Economic Affairs Secretary Ajay Seth has said the Budget announcement related to reducing debt to GDP ratio is a policy intent. In an interview with businessline, he said this will be followed by legislative measures. Excerpts from the interview:

The Budget talks about a shift to lowering debt to GDP ratio from sticking to rigid fiscal deficit. What kind of changes are we going to see?

You are getting at a legislative anchor for fiscal consolidation. We are not yet at that stage. If the debt stock is really very high, even a 3 per cent limit can be unacceptable. An economy which is growing fast and has the potential to retain that high growth over a period of time, has the capacity to sustain higher debt and also needs more investment. We have the confidence that we can continue at least for next 10 years at 7 per cent growth. We need more investment. At the same time, we can’t be doing at the current level of debt stock which is about 56 per cent; it has to be much lower, say below 50 per cent. So the first port of call has to be that instead of looking at a number around the annual accretion to the stock; look at the stock itself and see every year that the stock as a percentage of GDP goes down. That means one is moving towards building buffers for any exigencies. Why we are linking it to GDP is because all revenues to the government is tax to GDP ratio… that is what gives us the primary capacity to sustain or to service that particular debt. Here is a much more comprehensive approach for debt sustainability. There may be years wherein we may require more in some years and less in some years. But the point is, every year we need to chip away on that debt to GDP percentage. So, legislative mandate will follow from there. It can be through a policy statement. It is not mandated under law. So, the next question is do we continue with the policy or we continue towards a legislative measure. That question will come in a year’s time, and not now. First is that the policy intent that Finance Minister has announced … and work on ways to operationalise the policy intent. 

With reduction in the fiscal deficit, borrowing is set to come down. What kind of impact do you see on interest rate and liquidity from reduced borrowing?

Government borrowings are somewhat less and this should be positive for the markets. Our sense is also that the private sector requires more money. So government borrowing less should be good for the economy. 

Fiscal deficit is coming down by 0.2 per cent and this should have translated into ₹65,000-70,000 crore; whereas government market borrowing has gone down by ₹10,000-15,000 crore. So why the difference… because we expect lesser money to come through the small savings schemes. If small savings (NSSF) flows were to be more, we may need to borrow less. But that assessment will be done only at the revised estimate stage.

 With the latest rejig in capital gain and Securities Transaction Tax (STT)? The sense is there will be no freedom for people to choose the instrument. Is the government forcing and influencing my decision on the choice of instrument?

These are two different things — one is rationalisation of capital gains taxes and the other is STT. These are two different purposes and two different taxes. 

Instead of tax policy nudging people to invest in debt or equity, listed equity or unlisted equity, gold or property for investment purposes… government is saying there are two types of income; we want to treat asset classes similarly, and that is a policy stance. 

There are two types of income. First, there is interest on debt or equity that comes every year; second is capital gains. Government is saying we will be neutral to any asset class. Only difference is we are saying one is short-term and another is long-term, we will try to have uniform definition of short-term or long-term (holding period across asset classes). This would mean letting investors make their own assessment of risk and return profile of each asset class, and letting them take a decision. Otherwise, what was need to have higher taxation on unlisted equity than listed equity? 

We have done huge amount of rationalisation to meet the expectations from market players to make it uniform, and simplified it. This is not the end of the story, and a lot more simplification has to further happen beyond these two taxation aspects. 

STT is different. Derivatives market has a very important role to play. So that people can hedge their risks there. 

But there has to be an appropriate balance. If speculation activity is very high, and SEBI has brought out that aspect with nine out of ten people losing money, the question arises for the person who is a large investor. It is for him to take the call whether he remains large. It is not for government to take that call. But the question is whether people have the right kind of information to take those decisions? Or are they getting into a market with the expectation that it will swing only in one particular direction?

So taxation change in STT is, in a way, a nudge or direction on addressing speculation activity. So capital gains and STT are two different taxes with two different purposes. 

Do you expect SEBI to come out with more steps on the F&O front?

It is for SEBI to take appropriate decisions at an appropriate point of time. You will get to know. The volumes in Indian derivatives market in proportion to our GDP, and our income levels, are far larger than any other economy in the world. 

There has been not much response to green bonds. Are you planning new incentives?

The idea of green bonds is an assumption that there are a set of investors who will be ready for lower returns in the expectation that their monies will be utilised for the specified purpose of green investments. Globally, green bonds have got a green premium of maximum 8 basis points. This is not significant. When we floated it last year, our experience was about a premium of 4-5 basis points which was too insignificant. This year in May, when it happened, there was no premium for green bonds; so the question was why to have green bonds. It is too early to take a call whether those set of investors are there in the Indian market. We have released a report on how the funds mobilised as green bonds have been utilised. Another measure, taxonomy for climate finance, is also being put in place. It spells out the standards and classifications suited for our conditions. We will inform the market in a better manner, and see for a couple of years whether there are investors who will settle for lower returns provided their monies are used for green purposes; do they exist or don’t exist. 

 With the lowering of custom duty on gold, the expectation is that people will again go after physical gold than gold on paper. How do you see this? This is important as sovereign gold bond is part of borrowing.

Sovereign gold bond is not any significant amount. In sovereign gold bond, the principal is denominated in terms of gold in grams. So at the end of the period, so much of gold in grams will be returned. This is a different kind of bond, but not a means for financing a deficit. If those were not there, the government can borrow from the market.

Holding an asset in the form of gold has its own set of challenges. Holding of gold in bond is much easier. Budget was not an occasion to look at it. When government is deciding its taxation policy, the policy is not decided keeping in mind the government’s own borrowings.

What is your take on the likely impact of gold import duty cut on current account deficit? There is now a possibility of surge in gold imports and this may affect our current account deficit. When duty was raised, it was said to be done to check current account deficit.

I think the duty was raised at a time when we were under pressure over current account and exchange rate. Those conditions do not prevail any longer. Should policies not change when circumstances change?

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