Economy

States need to ramp up expenditure on healthcare, says CEA Subramanian

Shishir Sinha New Delhi | Updated on June 11, 2021

Chief Economic Advisor KV Subramanian   -  BIJOY GHOSH

Food inflation is expected to ease with the arrival of monsoon season

The Chief Economic Adviser Krishnamurthy Subramanian expects spending as well as rapid vaccination to boost GDP growth during second half of the fiscal.

He remains optimistic about the economic recovery path. In an interview with BusinessLine, he said that he hopes prediction of normal monsoon will further ease food inflation, but wants to be watchful for a couple of months.

Excerpts:

RBI too, like others has lowered growth projection to a single digit. Are you still optimistic about double digit growth as projected in the Economic Survey?

We have moved from a situation of ‘unknown-unknown’ (during first wave - what to do) to ‘known-unknown’ (during second wave - how much to do). The lockdowns were asynchronous and heterogenous in their timing. For instance, in April only some States imposed restrictions -- primarily Maharashtra. Then Delhi, Chattisgarh and Madhya Pradesh also went for a lockdown in April. In May, of course, the number of States going for restrictions were much higher, which was also reflected in the high frequency indicators. There was also a decline in power consumption and e-way bills, but they have since started rising. So, based on all these, we had assessed that the impact is not likely to be huge. The assessments that have come from the RBI are consistent with our own assessments.

Economic Survey has highlighted about the healthcare facilities and related problem for an individual. Now, SBI has come out with a report saying that health expenditure will grow from 5 per cent to 11 per cent in terms of Private Final Consumption Expenditure. Will you suggest policy prescription to bring down this cost and give some relief to individuals?

Health is a State subject. Therefore, the spending on health, as a percentage of GDP is something that States must be looking at because one of the key things that we highlighted was that if, for instance, overall health expenditure (public spending), as a percentage of GDP increases from the current levels to even 2.5 to 3 per cent of GDP, the fall in the in the personal expenditure of households will be huge.

Remember the scene from the film 3 Idiots, where Rancho and Farhan go to Raju’s house for dinner?One of the key aspects of the scene is when Raju’s mother begins to lament about how her husband's health care expenses are leaving precious little for them to spend on their own other consumption activities. This story has actually gotten played out depressingly in the second wave, and therefore, there is an immediate need for States to ramp up health expenditure. Instead of giving freebies in the form of a television, the citizens in the State would benefit the most if those expenditures are actually directed towards healthcare.

Even the number of beds we have per capita is extremely low. The United States has 34 beds for one lakh population, Germany has 29 beds for one lakh population, we have 2.3 beds for one lakh population. However, it is still important for citizens to demand for the ramping up of healthcare expenditure by States.

Taking into consideration the reworked vaccine policy, higher spending on food subsidy, higher fertilizer subsidy and possible increase in allocation of MGNREGA, do you estimate an increase in the fiscal deficit?

Vaccination is really critical for the economy to pick up recovery momentum. If you recall, up until March with, 3.7 per cent growth in GVA, the economy had indeed exhibited a V shaped recovery. And when the second wave happened, it affected some of the momentum . If you have to regain that momentum and go beyond, vaccination is extremely important.

So, the fact that now vaccinations have been made free, and the supplies are being doubled, we are looking to vaccinate at high pace. This means that the GDP growth should return, especially in the second half of the year. This will have an impact because when you look at the fiscal deficit numbers, we can consider it as a proportion of GDP. Therefore, GDP growth affects our denominator. This is the first point.

The second point to consider is last year’s scenario. We had projected 9.5 per cent of GDP as the fiscal deficit number, while the actual number has come to be 9.2 per cent or 30 basis points lower. This time, with a 6.5 per cent estimate for the current fiscal, we've been much more realistic. I think once the growth numbers increase and I do expect that, at least a tax buoyancy on the indirect taxes side should continue. Moreover as the economy picks up, it is also possible that the direct taxes may pick up too. So, what we saw last year, could get repeated this year as well. At this stage, we are only two months in and I think that it is too early to start talking about any downside on the fiscal deficit numbers, because there is a lot of upside potential as well.

Next month, India will enter into its fifth year of GST. What kind of key changes would you suggest to be taken up on priority now?

From an economic perspective, I would suggest to continue the really good work that has happened on compliance and let it play out fully. Try to iron out some of the inefficiencies that are there in terms of the inverted duty structure. It would also be a good idea to think about the original proposition, of a three-tiered structure.

How do you see inflation, especially keeping in mind rising fuel and edible oil prices along with prediction for normal monsoon?

When you look at CPI inflation, the biggest contributor is food inflation. Last year, for several months, the CPI inflation was above the 6 per cent maximum, because of supply side issues that were created by the pandemic. But since then, the CPI inflation, and especially the food inflation situation has eased and normal monsoon should help in further easing. But I would also want to, maybe, for the next couple of months or so, watch the food inflation front.

In the medium to long run, if you look at food inflation itself, we and our analysis has actually shown that there are two areas - pulses and oil seeds, where the inflation has been higher. And that has been primarily because of demand supply mismatch. This is something that we should be looking to fix by increasing domestic production, by making sure that the producer incentives for both are better aligned. Also, in the medium to long run, not only the reforms, but the creation of infrastructure would help reducing supply side frictions, which are really critical to keeping the food inflation in control.

Published on June 10, 2021

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