India has seen no reduction in capital expenditure in the past five months, revealed Subhash Chandra Garg, DEA Secretary. Speaking about the concerns regarding the drop in capex, Garg said that "Capital expenditure so far in five months has been 44 percent of the budgeted. "

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Q: The assumption in the market was that the government would have stuck to its borrowing calendar for the second half. You have actually cut it by Rs 70,000 crore. The question though is that are you underestimating the risks? I know that the government has done its math and you believe that this is a credible plan that you have put forward but the skepticism comes from the fact that there are several risks especially on the external front, crude oil prices, the upside risk to inflation for instance that could be a challenge on the macros. So are you underestimating risk and are you overestimating revenue?

A: Our estimation on revenues as well as on expenditure front have been done very carefully. The other day Prime Minister reviewed it, finance minister also announced on this, and our deeper analysis of this suggest that we will not have any shortfall in aggregate on revenue front and we will be able to manage for the expenditure without effecting any cut.

There is always some natural reduction in expenditure that would always take place; this would also take place this year also. The additional expenditure requirement, we would be able to accommodate out of that. So on the fiscal math, we stay closed.

Q: When you talk about this natural reduction in expenditure, and that is where the concern stems from that are we going to see a drop in capital expenditure (capex) for the second half, are you saying that that is likely to be the order of the day?

A: No, not at all. Capital expenditure so far in five months has been 44 percent of the budgeted. We see absolutely no reduction in capex.

Q: I want to go back again to talk about what gives you the confidence on the revenue front because you said that you will not have any shortfall on an aggregate basis. Let us just break that down if we can. On the direct taxes front, you are hopeful of being able to do better than what you have projected. There is a concern on the GST front and you are hoping that some of the gains on the direct tax front will offset the shortfall on the GST collection front. However, you are nowhere close to the 1 lakh plus number on the GST side. So there is a hole of approximately about Rs 10,000 crore every month there. Are you also being overoptimistic on your disinvestment target because the target is Rs 80,000 crore? We are almost at the end of this calendar year and your last calculation was about Rs 10,000 crore odd. So how is the revenue math adding up?

A: I would not talk specific numbers but broadly speaking, the direct taxes are doing much better than our projected 14 percent increase for the year over last year. Non-tax revenues are also doing better than the budgeted ones. So on both these fronts we expect to have greater revenue realization; sufficient enough to cover if there is some shortfall on the GST. We do not expect any shortfall on the disinvestment either.

Q: I want to talk about crude prices because crude prices continue to be a cause for concern, hovering around the USD 80 per barrel mark. The reason I am asking you that because it fits in with the borrowing calendar perspective. I am trying to ask you that because if the government were to be forced to act on bringing down excise which so far you have not, but if this trend and trajectory continues for crude, the government may at some point be forced to act. Do you then have the room to be able to stick with the math that you have just spelt out?

A: I have said this earlier, the additional cost on petrol and diesel has to be borne by someone. The cost cannot be wished away. Today it is being passed on, tomorrow if we were to pick up some part of it to socialise it on all, there will have to be some measures taken to either increase the revenues or in that event do something on the expenditure side. However that is not what we envisage today.

Q: That is exactly why I was asking you that what gives you the kind of confidence with which you have actually reduced your borrowing program because this is a big uncertainty. You have got the Iranian sanctions that kick in from November 4, we do not know whether the rupee mechanism will work or what the situation will be with respect to Iranian crude. You talked about some measures will have to be taken on the revenue side as well as expenditure side, what does that mean?

A: The reduction in our gross borrowing program of about Rs 70,000 crore does not imply any reduction to finance our fiscal deficit. Our net borrowing required for financing fiscal deficit is Rs 3,90,000 crore, that stays as it is. So, that is not being reduced at all. We are not reducing fiscal financing.

We had two other elements here which we used to finance our fiscal deficit. One is the accretion in the national small savings fund and the other we have is the buyback program. What we have done is, we have re-evaluated the buyback program which was budgeted of about Rs 72,000 crore. We do not think we need to do that much of buyback this year, it is not required. We have done our calculations again for the trajectory of redemptions coming up in next 3-4 years, there is a hump only in the year 2021-2022 and not now in the next 2-3 years. Therefore, we will manage with much lesser buyback.

Second, we expect additional accretion in the small savings which we can use to fund the fiscal program. Therefore, taken together, we are confident that without affecting the financing of the fiscal deficit, this reduction can be done and which will be very useful because overall it reduces the draft on the savings in the market. Therefore, it has positive effect on the market and the savings deployment. However it has no negative impact on financing our fiscal deficit.

Q: Since you talked about this positive impact, how concerned have you been by what we have seen happen as far as the bond markets are concerned specifically with the yields and has there been a conscious effort on the part of the government to in fact go in for this reduction as far as the borrowing program is concerned to try and signal to the market?

A: There are several elements which play the part in the bond yields. When the bond yields crossed 8 percent, we were definitely concerned and we have said this that these bond yields are not justified by fundamentals and all. Therefore, let us do whatever we can to positively influence them and also work with the other elements to see that those are taken care of as well. So, there are several factors, but this is quite a significant and important one. So we hope that this will have its own positive contribution to make in bringing or influencing the bond yields in the right direction.

Q: Let me go back to the oil question. I go back again to the question because the possibility now of the government stepping in with some measures to try and reduce the burden on the consumer by way of an excise duty cut which so far has not happened, you talked about some measures, what kind of measures can we expect now and what kind of headroom do you have?

A: I do not think I would say anything on the oil issue today. Much has been spoken.

Q: But there was a meeting which the oil ministry officials, finance ministry officials including you, you were all a part of that meeting that took place. The oil secretary was there with the finance minister, so, I am guessing that there has been some discussion on the way forward on tackling this issue?

A: That was for a different purpose. We are evaluating possibility of oil companies accessing foreign borrowings on more longer term basis to improve on the capital flows. As you know, we have been trying to deal with the entire foreign exchange questions in a three pronged way. We are dealing with the current account by taking these measures on non-essential imports as well as to promote exports, etc. so that is one.

The second one is to shore up the capital inflows. Several measures were announced earlier on ECBs. This was also part of that process to improve flows on capital account.

Third obviously is which is not the occasion now, that if something is to be done to take care of the reserves position, but that is not needed at this moment. So this was as part of that effort, nothing to do with the oil prices.

Q: Since you talked about the measures that the government has taken when it comes to both the current account deficit as well as the rupee, let me specifically talk to you about both those because there is consensus with experts that we have spoken with that the import curbs that have been announced so far is not really going to have any meaningful impact to either rein in the current account deficit or really move towards any meaningful import substitution. So the larger question is, was this the first installment, is there something more coming, is there a second list that is being prepared?

A: I do not agree with this assessment that the USD 15 billion of the imports which have been dealt with by increasing duties will not have impact. I do not agree with that statement at all or that assessment. These are the consumer products, these are those products for which the domestic capacity exists. This alters the relative positions and we seriously expect that that would have a significant notable impact and the consumption would shift to the domestically produced goods. Therefore, it may not be USD 15 billion, but there would be some material impact.

Remember, 1 percent of the current account deficit actually means about USD 25 billion. So anything which can effect USD 5-8 billion would also have a material impact on the current account situation.

Q: What is the estimation now as far as the current account deficit is concerned? People are now working with a number of close to 2.8 percent, closer to 3 percent, what are you working with in terms of the current account deficit?

A: We cannot have any specific number but last year it was 1.9 percent of the GDP as current account deficit. We had flows of USD 44 billion into the reserves last year. So, 2 percent is very healthy level of current account deficit for a country like India which needs capital flows from outside. If it goes to 3 percent or 2.8 percent, all it means as I said is about USD 25 billion extra and that we can always manage by taking as I said the three pronged steps – take care to some extent on the current account, take care in the capital account. So that is quite a manageable situation.

Q: The last conversation we had before the measures were announced to prop up the rupee, there was a concern and it seems fairly clear that efforts are being made to try and defend the 73 per dollar mark without saying so clearly, but what more can we expect now in terms of measures especially when it comes to the rupee and also how concerned is the government about the liquidity squeeze that we are seeing play out in the NBFC space today. There have been measures announced by the Reserve Bank of India (RBI), do you believe that that is enough or do you think that coordinated action between the government and the RBI, more will happen?

A: Nobody is trying to defend any particular level. All that which we have been trying to manage is an orderly management of the rupee situation. There was this episode when it suddenly depreciated from 69 per dollar to 72 per dollar, that was the cause of worry and all these measures which I have said are being taken by the government. It is not a single measure thing, it is an all-round effort which is being done and that we believe will have significantly positive impact on the stability in the rupee front.

On your questions about liquidity, certainly we are concerned, the liquidity situation does not get affected only by what the amount of liquidity is available, but is also affected by the attitude of the players in the financial system and therefore we will need to deal with both of them, that we have sufficient durable liquidity in the system, but at the same time that the market participants do conduct their normal business of lending, borrowing and otherwise running the financial system.

So, I think some stability is returning on that. There were couple of episodes which created this kind of psychosis, these are as I said some stability is returning, and hopefully soon we will have a much more orderly situation in the market about the liquidity situation as well.

Q: You spoke about some specific events that seem to have led to this fear psychosis in the market, let me address that issue with you because there have been a spate of meetings today, you have been involved in several of them, on how to deal with IL&FS. Now the shareholders, LIC, SBI, etc. have come out and said that perhaps a formal plan will be put in place after the AGM takes place. However, what is the thinking, is it that the government will expedite receivables to IL&FS from government entities, LIC, etc. will provide some sort of lifeline. What is the thinking at this point in time and how concerned are you about the possibility of contagion on account of IL&FS?

A: Let me first clarify to you, there has been no meeting on IL&FS today. Second, the government does keep a close watch on what is happening on IL&FS. It is a valuable company present in the infrastructure space. There is a lot of PPP projects which this company is doing and it has got systemic importance. Therefore, government is rightly concerned what is happening and is monitoring the situation very closely. The finance minister said this couple of days back, what specific measures would be taken and when would be sort of taken in due course.

Q: Can you give us some indication, are we talking about a week, 10 days, or longer, because that is the big fear in the market of what happens to IL&FS and the consequences of ripple impact on account of it?

A: At this stage I would only say that that assessment is on, situation is being monitored, we are evaluating various options, and as soon as one is in a position to develop what is the right kind of action to be taken, the government will announce that.

Q: Yesterday we heard from a colleague of yours in north block who said that we are in the midst of a small storm. So let me ask you on the back of where you see things today, in order of priority, what would be the key concerns on the macros?

A: I do not know which colleague of mine said small storm or large storm or whatever. So I do not have that idea. The macro concerns, I think these are very well-known, we are all grappling with them on day-to-day basis and what purpose does it serve to recount them.

We have a lot of strengths on macro, our macroeconomic story is intact, is doing very well, our growth is very well, investment has started picking up, fiscal deficit situation is very good, inflation is perfectly in the right zone, there are some concerns on the foreign exchange front, oil and all, but I do not think a large economy like India and in a situation in which we are today globally when several events are taking place, there would always be some issues to manage.

Last year around this time we were managing the fallout after the reduction in growth rate and all. So it always happens, there are always issues at any point of time, those need to be dealt and are being dealt with.

First Published:Sept 29, 2018 3:07 PM IST