Economic Affairs Secretary Ajay Seth has told businessline that the Sovereign Gold Bond scheme has neither benefited the government nor the economy. At the same time, he said the government has adopted a wait and watch strategy for sovereign green bond. Edited excerpts:
We are talking about debt-to-GDP ratio; would we have a specified fiscal deficit target from FY27?
How will that work? What is the intent?
Intent is that there should be enough fiscal room available so that the government’s ability to spend is not constrained. We have to look at the proportion of tax or revenue receipt the government being spent on interest payment with the ultimate aim of debt related to GDP being brought down. Over a period of time, that proportion of tax revenues which go on to pay the interest will come down. That means more money is available. That really is the intent. We have an elevated level as of now – about 57 per cent of the GDP – that has to be brought down.
How much the government borrows in a year is relevant only from the perspective of how much is left for the private sector to raise money from the domestic market and that has a growth implication. That is important objective. But fiscal consolidation has twin objectives. One is to create fiscal capacity to meet the needs of today and tomorrow. The second is to have enough space to be able to meet the next crisis. From 2014 onwards, when the fiscal consolidation started till just before the pandemic, debt-to-GDP ratio was at about 48 per cent because we were in fairly robust state. One could borrow significantly during that period and manage or could support our efforts towards crisis management. Now we are at an elevated level. It has to be brought down. So, the perspective is different. Based on the roadmap according to FRBM, scenarios have been designed, and fiscal deficit will be accordingly computed.
What kind of changes can we expect in the expected financial sector regulations?
This will be discussed when all the regulators in FSDC, chaired by the Finance Minister, will sit together and evolve a mechanism. The idea is that whatever we do, we must always think about how we can improve that interaction. There are a few issues with regard to prudential norms. Regulations also have to be periodically reviewed. In any organisation, including in the Department of Economic Affairs, there is always inertia. If you ask why something was done 10 years back, one has to really go back and see why it was done. We have to be inquisitive of the rational of our actions.
In our economy, we have to take productivity several notches higher, and we have to see whether any regulation being brought in, a procedure being brought in, a requirement being brought in – are they relevant for today’s need? What the Finance Minister said for the taxation domain applies to others as well – that ‘trust first, scrutinize later’. The dictum is true for governance across the board not just in tax administration.
We have not seen good response for green bonds. What kind of changes can be made?
When this instrument was brought in our country two years back, the feedback from the market was that there are a set of investors who will settle for a finer yield provided the monies are used in a very certain manner in green projects. So, we brought in the framework. But that kind of a green premium is not coming. Our experience has been just about 2-3 basis points. Globally, it has been of the order of 7-8 basis points, not beyond that. It doesn’t make any sense to get to that route, but we do not want to pre-shelve that. We’ll see for some more time whether there is really an appetite, or this was just coming from a boardroom conversation.
Sovereign Gold Bond scheme has been very popular but there has been no tranche so far in this fiscal and also there is no talk about next fiscal. What do you have to say?
This may be good for people with higher levels of saving who want to diversify. But from the economy perspective, there is a hardly any gain. We import very significant part of our total consumption or the investment. This is a negative for the economy but for that individual investor, it is diversification and some returns coming up. Expectation at the time of launching the scheme was that it will moderate the import requirement. If it were to be a sizable amount out of our total import bill, it makes sense.
We import about 800 tonnes in a year. If reductions were to be order of 40-50 tonnes, it makes the case. What if it is 5 or 10 tonnes? It is neither here nor there. Also, there is not much foreign exchange savings. On the other hand, this is among the costliest borrowings for the government. Otherwise, borrowings are available at 7 per cent here while the cost of gold bond is 12-15 per cent. So, neither the economy nor the government is gaining. Of course, individuals are gaining. At this point of time, it doesn’t make economic or fiscal sense to continue with this. That’s why no fresh issuance of gold bond has been done. But I’d just like to make one point – whatever commitment has already been made to gold bond holders will be met 100 per cent in terms of redemption and tax treatment.
Stock market has not reacted very positively. It also has some impact on rupee, which touched all time low today. What do you have to say?
When we talk about rupee being low or high, we have to see what the flip side is. We have seen in the last couple of months, the dollar has strengthened against all currencies. It is the strength of the dollar rather than any currency getting weakened. Of course, there is the other side which is the behavior in the foreign exchange markets the world because the dollar is getting strengthened. Even today morning when I looked at it, Dollar Index has gone close to 109. How the market perceives different developments is another matter. We find that when custom duty on certain drugs is brought down, the stock of those firms will go up. The same can be seen in terms of hospitals or hotels.
Different segments of the economy react in a different manner. Take a look at capex. It is very-very high at that this point of time. That may have some impact. I am not sure that what impact it has got. On the other hand, more economic activities mean better capacity utilization of factories which means more investment in the pipelines. It will positively impact certain other segments. So, a particular price level or the movement of the market is a outcome of several factors. What is happening globally? Where are global indices moving at this point of time? Where are the global capital flows moving? So, these are the elements which determine (the movement). We should not read too much into the movement.
We import very significant part of our total consumption or the investment. This is a negative for the economy but for that individual investor, it is diversification and some returns coming up.Ajay Seth, Economic Affairs Secretary
Published on February 3, 2025