Former RBI Governor and head of the Expenditure Management Commission Bimal Jalan believes that there is no conflict between fiscal consolidation and public spending. The more important issue is where the spending takes plac, he said in an interview with BusinessLine . Jalan, who is likely to submit one last report on the expenditure management reforms by the end of this month, said that Fiscal Responsibility and Budget Management Act should not include quantitative goalposts. Excerpts:
What is your view on the fiscal consolidation versus public spending debate?
There is no conflict between the two. The more important issue is where the spending takes place. We have two high priority areas — public investments and use of technology to transfer subsidies to the poor. In my view, the fiscal deficit we have now is in very reasonable shape. It is more important that fiscal deficit is within a range. A deviation of 0.2 per cent to 0.3 per cent is not very significant, but since the Fiscal Responsibility and Budget Management (FRBM) Act has prescribed it, we have to stick to it. If the Finance Ministry decides to achieve the goals of the society in a non-inflationary environment, it can amend the Act.
There is nothing wrong with the FRBM Act per se. But I feel that we should not fix a quantitative fiscal deficit targets in the Act. Leave it to the Finance Ministry. What we want is three different goals through our fiscal moves — investment and jobs; growth; investment, growth along with financial stability, and relatively moderate inflation.
All these goals have to be achieved and the balance has to be struck by the government rather than prescribed in an Act.
Has the Expenditure Management Commission submitted all its reports? Does the panel support Direct Benefit Transfer to rationalise spending?
One more report will come in before or around the Budget. Nobody can disagree with DBT. We have a great advantage — access to mobile phones and identification through Aadhaar card. So we can maximise transfer of benefits through DBT.
What is your view on the health of the banking system? Many international rating agencies have raised concerns over it. Is the Indradhanush scheme sufficient?
The banking industry is in good health as it is made up of mostly public sector banks. The issue is how do you make the banking system perform as per rules laid down by the RBI? Indian banks follow all international norms (Basel) on capital adequacy ratio. So this is achievable.
I don’t accept the view of international rating agencies. There is no problem as far as private banks are concerned and the public sector banks are sovereign. Our fiscal deficit is low unlike Latin American countries where non-performing assets (NPAs) are large and fiscal deficits are huge. Our fiscal deficit is in line, inflation is moderate, so there is no problem in coping with NPAs.
Whatever is being done through the Indradhanush scheme is a good move, I don’t know if it is enough.
The government itself has announced that it would take care of the banks. The bankruptcy law will take care of defaulters. Bank credit is not something that can be overleveraged by corporate or public sector enterprises.