The Budget bet is coming intense on whether Finance Minister Arun Jaitley will compromise fiscal consolidation to stimulate growth. Speaking to Bloomberg TV India, IDFC Managing Director Rajiv Lall said meeting the fiscal target is more important than stepping up government spending to spur growth. If the government is unable to substitute private investment with public capex, then India may have to settle for a lower rate of real GDP growth of 6-6.5 per cent, which is not really a bad thing given the slowdown in the rest of the world, he said.

There is intense debate on whether Finance Minister Arun Jaitley should deviate from the FRBM path to hike spending for lifting growth. What’s your perception on this?

For the first time ever our nominal GDP growth has been lower than our real GDP growth. There is a lot of confusion about the veracity and the robustness of real GDP. We can be much surer about the nominal GDP numbers. When nominal GDP is not growing as fast or growing as slowly as it is, then we have to worry more about debt dynamics because that works all on nominal GDP basis. So sticking to the fiscal consolidation target in this environment actually becomes more important than spending a little more to contribute to growth. I would be less certain about making this comment if I could be much more confident about the nature and speed with which public money is spent. If public money could be spent quickly in critical infrastructure then I could on the margin make the case that look making this investment would yield a quicker result. It is called the multiplier effect, it is fairly rapid — it’s called the multiplier effect — and it is tangible and fairly rapid. Therefore, I can justify even in this challenged environment where debt dynamics are of greater concern, I could justify a slower pace of consolidation. Then you have the Pay Commission and OROP.

So you see very little room for the government to significantly increase spending?

It certainly seems so. Its own perception is that it has little room. You change the quality of government spending and the speed with which they can change it.

But the government has to recapitalise PSU banks considering their NPA levels. So where will the money come from? If banking sector is saddled with NPAs, what is the road ahead for the economy and what can the Budget do for it?

I don’t want to speak on behalf of the government and imply in any way that what I am about to say represents their position. But the reality is that the government doesn’t have the money to recapitalise the banks to the level they need to get recapitalised. So whatever the estimates are — it range from ₹1.5-4 lakh crore. Let us take a number in middle — ₹ 2 lakh crore —is what the public sector banks need to recapitalise. Government does not have that money. At today’s market prices, they have committed ₹70,000 crore. But still ₹1 lakh crore has to be raised from somewhere else. If the public sector banks try to raise that amount from the market, they will have difficulty and they will get it at a price that would unambiguously reduce government ownership to below 50 per cent. So net impact of this is I do not know whether it is by design or it is by default. Either way, what I see happening is that public sector banks will be constrained for capital.

But that is still some time away. Right now the immediate impact of this capital squeeze for banks is resulting in slow down in lending and infrastructure is not picking up. How do you see the untangling of this because it has taken many years of efforts?

I do not see it happening any time soon. This will take time. I am not very optimistic about the return of private sector infrastructure any time soon. If the government is not able to substitute (private investment) with public investment, then I am afraid we will have to reconcile ourselves to a lower rate of real GDP growth — may be 5-6 per cent or 6-6.5 per cent. Given what is happening in the rest of the world, it is not a bad thing.

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