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Interview | C Rangarajan, former governor, Reserve Bank of India – ‘High growth only hope, so design expenditure mix well’

‘The fiscal deficit in the coming year should be lower by 1% (of GDP) and touch 5.8-6%, as against 6.8% likely this year, and if the finance minister reduces the deficit each year by 0.5% of GDP, then we could get to the 4.5% goal by 2025-26,’ ex-RBI Governor says.

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'The polarisation of wealth has happened particularly because Covid-19 has impacted the vulnerable groups much more, like daily wage earners and others, Rangarajan says.

Can the Union Budget alleviate the pain of the common man, ease the challenges faced by industry and take the India growth story beyond just recovering lost ground? C Rangarajan, former governor, Reserve Bank of India, believes high growth is the answer to all the problems. The best years between 2003 and 2008, when growth averaged over 8%, Rangarajan recalled, were also the times when many safety net initiatives were unfolded, such as the one on the rural employment guarantee scheme and extended food security. This was in an economy that was also seeing poverty rates fall. Rangarajan tells E Kumar Sharma of FE Digital the government must push growth and also signal fiscal consolidation. Excerpts from an interview:

How has the pandemic impacted you personally?

Well, the pandemic has affected everyone in one way or the other. I have rarely travelled outside of Chennai during the entire two-year period, and there were many days when I have not even stepped out of my apartment. I have given many lectures online and webinars have become common, and one has got to get used to it.

Also, the Madras School of Economics, with which I am associated as the chairman, has had to undergo various changes in the light of what is happening. The students admitted to the MA programme last year may complete their degree without coming physically to the institution.

What are your major concerns as we await the Union Budget ?

I think one impact of Covid-19 has been to slow down growth. At the end of this fiscal year, we will be at where we were in March or April 2020. The Budget and the policymakers have to do two things: Accelerate growth in the coming year, lay the base for a faster growth thereafter. The original growth rate projection for the current year was 9.5%. I feel it will be around 9% or may even go a little below 9%. In 2022-23, the best we can achieve is a 6-7% real rate of growth. But what may be relevant in terms of raising taxes and on expenditures, is the nominal rate of growth and this, in the coming year, we should plan for 12-13%, with an implied 5% to 6% inflation.

The revenue growth performance of the central government in 2021-22 was very good and saw gross tax revenues increase by almost 50.3% in the first eight months, and during the year estimated at about 35%. But this is very high given the tax buoyancy of 2, and this may not be maintained in the coming year because 12-13% nominal growth implies a revenue growth rate of 26% in the coming year, which may be unlikely. This is because the best we have had so far has been around 1.2 tax buoyancy and this could mean a revenue rate growth of 15-16%, which may be possible in 2022-23.

Does the FM have enough fiscal space to accommodate the expenditure needed to meet demands from the various sectors?

The priorities are very clear. There are three types of expenditures which have come on top of the regular expenditures that the government will have to incur. The first is on healthcare, the second is the expenditure required in order to meet the needs of those from the vulnerable groups impacted by the pandemic, and the third, the expenditures needed to stimulate growth in certain sectors of the economy badly affected because of Covid-19. In addition to these, there has to be focus on increasing the capital expenditure, and looking at the infrastructure pipeline more closely and augmenting it. All of it is possible since a tax buoyancy of 1.2 gives 15-16% growth in revenue, and a 6% fiscal deficit leaves you with an expenditure growth rate of 12-13%. What is important is, how do they adjust the expenditure or the composition of expenditure, and that is where some serious thinking will have to be done.

In summary, the Budget should aim at accelerating growth in the coming fiscal year, lay the base for further growth and give out a signal for fiscal consolidation.

The fiscal deficit in the coming year should be lower by 1% (of GDP) and touch 5.8-6%, as against 6.8% likely this year, and if the finance minister reduces the deficit each year by 0.5% of GDP, then we could get to the 4.5% goal by 2025-26. The 6.8% fiscal deficit is high as the implicitly mandated deficit is 3% of the GDP.

How can the Budget deal with the problem of increasing income inequality?

The polarisation of wealth has happened particularly because Covid-19 has impacted the vulnerable groups  much more, like daily wage earners and others. Therefore, if you succeed in getting the growth rate back at 6-7%, some of the bad effects of Covid-19 can be overcome. What we really need to do in India is to achieve a higher rate of growth in the economy, and through that, take care of all the vulnerable groups through a variety of social safety nets. Let us understand it was only in the high-growth period, we were able to introduce the rural employment guarantee scheme, introduce extended food security and the poverty rate did fall at that time. Therefore, the best answer is in high growth, and growth is also the answer to many of our socio-economic problems.

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