‘We have made space for RBI to cut rates’

“What we have done in the Budget is to create space for the Reserve Bank to cut rates,” says Jayant Sinha, Minister of State for Finance, hinting that the ball is now in RBI Governor Raghuram Rajan’s court. With retail inflation easing, a rate cut is widely expected.

In a conversation with BusinessLine , Sinha, who has been an investment manager and strategy consultant, accepted that on the issue of taxing the Employees’ Provident Fund, more work could have been done. Excerpts:

Do you think the EPF taxation issue could have been handled differently? Did the response surprise you?

We could have definitely done more work in terms of consulting the public on the question of public pensions. The goal was to align the different pension systems. Tax revenue was not the objective. It was simply to provide people with good choices for a pension.

As of now, the National Pension System (NPS) does not get the same tax treatment as PF. So we wanted to improve NPS and also re-align the PF a bit, so that the two are at par. This required putting restrictions on EPF. We do have a lot of experience with people’s reactions to tax proposals.

Is the government looking at alternatives to the EPF proposal?

We plan to have a series of public consultations, including discussing different alternatives and seeing how a consensus develops. Obviously, people will prefer to pay less tax. We have to balance people’s desire to pay less tax, in a simple manner, with the needs of the state.

There were expectations that the Budget would widen the tax base and also give relief…

There are always expectations of this kind. But we have to balance this with the needs of the country and where we are fiscally, in terms of the fiscal deficit, debt, etc. We would like to provide as much tax relief as possible, but we also have to see the country’s debt capacity.

Right now, India’s interest burden is the highest ever. So, we have to see how much debt we can sustain. The debt-GDP ratio is at almost historically high levels. If we increase the fiscal deficit, the cost of borrowing would go up and our ability to sustain (rein in) the fiscal deficit would reduce. The very positive reaction of the bond market, foreign exchange market, rupee and share market was a relief.

Can we expect a rate cut by the RBI next month?

What we have done with the Budget is to create the space for the RBI’s rate action. At this time, if you look at the fiscal and monetary side, you will find that the fiscal side is much tighter. There is a lot more monetary space as inflation pressures are subdued. Also, there is weak aggregate global demand and, lastly, central banks around the world are following unconventional monetary policies.

There have been questions about whether 7.6 per cent growth is really taking place…

The economy is actually growing at the projected rate. But, the nominal GDP growth is in the 5-5.5 per cent range. The GDP deflator is deflating by about 2 per cent. So, the gross value addition in the economy is about 7.5-7.6 per cent.

People remember the nominal GDP growth rate at 15 per cent when inflation was growing at 10-11 per cent and the real GDP growth rate was 5 per cent. Now, they feel something is wrong as the nominal rate is low. This is the difference between statistics and personal perception.

Continued on p13

COMMENT NOW