Private investments have only recently picked up. Do you think the fiscal deficit target of 4.5% can be achieved without a significant rise in private sector expenditure?

First, I think the current growth momentum can be sustained even at a slightly lower fiscal deficit, because I do not see the absolute amount of capital expenditure declining from present levels. That is 10% revised to 9.5% for the current year and 11.1% in the next year. 

I do not think that the consolidation will come at the expense of reducing that. It will come partly through increased revenue, increased denominator in the GDP [gross domestic product] and perhaps through some compression of other expenditure as a proportion of GDP. So, I do not think that we will be seeing any reduction in the levels of capital expenditure. What private capital expenditure can do, if it increases, is to push up the rate of growth.  

Do you think that if this government returns to power, it would be able to achieve the Fiscal Responsibility and Budget Management (FRBM) target? 

I am not speaking on behalf of the government because it is a speculative thing. What I believe is that the whole philosophy perhaps needs to be revisited. I think the old philosophy of a fixed 3% target as a permanent fixed objective is questionable. 

India with its real growth rate, its rate of inflation and its interest rate is capable of a particular level of sustainable fiscal deficit. That figure is greater than 3%, without even leading to an increase in debt, because we have a nominal growth rate which is likely to be in the region of 10% to 12% over the coming years.  

With 10% growth, you can run more than 3% and still have a declining debt profile. So, 3% is, I think, too austere for India’s current circumstances. And if it is pursued, it may actually curtail our potential growth. But the real optimal rate is probably closer to 4%-plus.

India’s ratings have not changed for a while. If we get an upgrade, what kind of impact will it have on India’s profile?

Rating agencies say what they say, we live with that. I do not expect anything from the rating agencies. They will do what they do, we will do what we have to do.  

An upgrade, however, will help in terms of lowering costs of capital. But I also feel that a stage will come soon when, if we continue to be fiscally prudent, these ratings will become irrelevant.  

At what point should the government focus on increasing India’s tax-to-GDP ratio? Talks of rationalising goods and services tax (GST) slabs have been on for a while now. 

Whether rationalising the GST slab will lead to an increase or reduction in the ratio is a moot point. The rates were brought down in 2019 below the revenue-neutral rate. It is a difficult task before the GST Council because in rationalisation, everyone likes one half of the rationalisation, where something is going down. Nobody likes the other half of the rationalisation, where something will go up.

There is a buzz of premiumisation of the Indian economy. What do you think is the reason behind this phenomenon?

It has become a cliché to say the rich are getting richer and the poor are getting poorer. It is probably true the rich are getting richer. But the poor are not getting poorer. Now, how do you increase the consumption standards of the middle class and the poor? The answer lies in creating more jobs.

And second, in ensuring that the rich pay their taxes. If you look at income tax, some of them [the rich] were using investment-linked insurance as a way of avoiding income tax. There were people who were contributing Rs 200 crore to the EPFO [Employees’ Provident Fund Organisation] and enjoying tax-free interest. Those all have begun to show as dividends in terms of tax collection. GST, of course, also plugged loopholes.  

Do you think the government should be able to bite the bullet on farm income taxation?

Taxation of farm income constitutionally is a state subject. It is open to the states to levy this tax.

Exposure of India’s credit to global investors is now expected to increase after the announcements of its inclusion into global indices. How does this influence policymaking?

India being included in any index has a plus and a minus. The plus side is that the pool of resources will increase, so it is likely to lead to a reduction in interest rates, which we have to pay on government bonds, which in turn will have a positive effect on state government bonds, corporate bonds and lending rates.  

However, there is a negative effect.   Let me give you a hypothetical event. In a big developed country, a particular person gets elected as president. That sends lot of tremors across financial markets. They react by what they call a flight to quality. These behaviours are rationalised by the markets. They are not rational. In this flight to quality, everybody buys bonds of the very country whose risk has increased, because that country is an international benchmark.   

It is not that India has become fiscally profligate… I may get punished for somebody else’s misbehaviour.