TV Somanathan on the trade-off between spending and fiscal consolidation

In FY23, the government had planned to borrow a lower proportion of its deficit from the National Small Savings Fund compared to last year. In FY22, the government borrowed Rs 5.91 lakh crore from small savings and in the new financial year, it intends to borrow Rs 4.25 lakh crore.

This, too, drove up borrowing in the market.

Could the government have chosen to control borrowing by borrowing more from small savings or by using high cash balances with the central bank? “Let’s see if we end up having significant cash balances at the end of the year,” Somanathan said. The decline in borrowing from small savings, he said, was based on the expectation that inflows into such schemes could slow in the new financial year.

“In the current year, because we have had huge inflows of small savings, the proportion of borrowings in the market is lower,” he said. “Next year we’ve taken a small growth in savings at 10% over the previous year’s budget, not at the level we’ve actually seen this year.”

According to Somanathan, inflows into small savings tend to be very sensitive to interest rates. Last year, low bank deposit rates may have prompted a shift towards small savings. “If the interest rate environment changes, we may not see these kinds of small savings inflows.”

While choosing to increase its total expenditure by 4.6%, the government has sharply increased its capital expenditure from Rs 5.5 lakh crore last year (excluding adjustment for Air India dues) to Rs 7.5 lakh crore this year. As part of its capital expenditure, the government has earmarked a long-term loan of Rs 1 lakh crore to the states for capital expenditure.

Somanathan said the decision to cancel this state capital expenditure loan was based on feedback from state finance ministers who found a similar provision made last year.

“The reason is that the basic assumption or objective of this budget is to kick-start jobs and growth through infrastructure investment. Basically, the objective is to try to create good-paying jobs rather than palliative jobs or relief expenses,” Somanathan said. “To do this, we need to ensure that this expenditure is actually spent on the ground and we need it to be widely disbursed geographically and sectorally.”

According to Somanathan, the ability of central enterprises and central ministries to absorb a huge increase in capital spending is limited. In addition, core projects are confined to certain geographical areas and are mainly located along railway lines, national highways, etc.

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