Interview with Finance Secretary TV Somanathan

Consumption levels continue to be constrained by restrictions such as the weekend curfews and are affecting the consumption levels, Finance Secretary TV Somanathan said. In an interview with The Indian Expresshe said capital expenditure by states will have a quicker effect since it has a “greater geographical spread and a greater diversity of projects” compared to capex by the Centre. Edited excerpts:

There has been a marked reaching out to states. Was it nuanced? How will the capital expenditure plan work with states?

Yes. It has proved very successful in year 1 and year 2. We gave Rs 12,000 crore in one year, and Rs 15,000 crore in year 2. In both years, it has been very quickly and, effectively, spent by the states. It has been welcomed by the states. There was feedback from the states that it was very useful to them to preserve capital expenditure during the pandemic, please continue and increase.

If you want capital expenditure to happen quickly, states are in a much better position to do it. Because they can do scattered small projects across the country in every district. The Center operates on certain big axis projects like national highways, railways, pipelines, telecom, that has its own value but this has a greater geographical spread and a greater diversity of projects. So, it has a good chance of being effective. So, we thought that in this push, some portion must be done through states especially because of the positive reaction by states in the meeting. They said give it to us and we will use it.

So, it’s a shift in stance on capex by pushing it more through states?

We started in 2020-21. Aatmanirbhar package was when we first announced Rs 10,000 crore of capex for states. That has continued in year two and has now been expanded. It has done very well. They have all spent it. It’s only for capital, they cannot spend it for anything else. It does not crowd out, it’s not like a Centrally-sponsored scheme where if we give 60 per cent, they find 40 per cent. They don’t have to find anything. We give them the entire cost. So, no state has any financial problem in accepting this. And it is over and above their normal borrowing, so it is pure additionality with no necessity to take away any existing resources. So it’s obviously very popular. Only condition is that it is tied to one or two reforms sometimes and it is tied to capital expenditure and cannot be used for welfare expenditure.

This fiscal there might be a bigger multiplier because they might spend less on health and there would be more space to spend on this.

Yes.

The Budget does not seem to acknowledge those lower down in the society.

I think the restrictions on consumption are preventing the well-off from consuming. Restrictions are not stopping consumption of the poor, that is getting impacted by lack of income. What I’m saying is you do have a force, which is the consumption of the rich and the middle-class, which is being stopped. Now that could very easily create a lot of jobs. These two-day curfew restrictions may have to go. Consumption has to come from the rich in volume terms. In an unequal society, a greater share of consumption comes from the well off. Say, I go to a restaurant, there’s somebody standing there, I have to consume for that person to get his job back. The restrictions are affecting the consumption of those who can afford to consume.

I’m not neglecting or offsetting it against the fact that people have suffered income shocks and they can’t consume because they don’t have money. I admit that these two are not necessarily connected. Most of the flagship programs continue. Gram Sadak Yojana is up 27 per cent. Counterpart funding for Gram Sadak Yojana is being allowed under Rs 1 lakh crore of capital, that is capital for the states. That is job creating, that is unskilled jobs in rural areas. What has not been done is a direct cash transfer. Short of that, I think a lot of programs are out there. Nal se Jal has Rs 60,000 crore (outlay), that has a lot of employment creating effects in rural areas. It’s a record outlay for Nal se Jal, for PMAY. The government is trying to create actual output through genuine jobs and not through cash transfer.

For that (cash transfers), the bus was missed perhaps after the first lockdown.

The international experience has been the answer, it has not proved successful in most countries in terms of spending rather than saving. Look at the developed countries’ experience, most of it is saved. It has not proved successful even in the first wave, we had studies showing that in the Jan Dhan accounts 30-40% was saved, 70% was spent. If you want generation of demand and you have 100 rupees, you can either do 70 rupees of demand through cash transfer or 100 rupees of demand through government expenditure. And that 100 has a higher multiplier than the 70. We believe that the growth effects of spending are better when it is direct government expenditure rather than income transfer. And income transfer has been handled more through the food route and through the welfare, existing welfare and safety nets, both of Center and states.

There’s a segment of urban poor also. Do the schemes address that segment?

A proportion of this capex to states will be for urban. There is a component, which has specifically an urban component. That has been tied to some reforms in building laws and so on, but it is intended for generating urban projects. Amrut 2.0 has been launched. There is a considerable increase in it. We have a few easy-to-meet reform criteria.

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