Consumption levels continue to be constrained by restrictions such as weekend curfews and are affecting consumption levels, Finance Secretary TV Somanathan said. In an interview with The Indian Expresshe said state capital spending will have a faster effect since it has “a greater geographical distribution and a greater diversity of projects” compared to the capex of the Centre. Edited excerpts:
There has been a marked contact with the States. Was it nuanced? How will the capital expenditure plan work with states?
Yes. It was very effective in years 1 and 2. We gave Rs 12,000 crore in one year and Rs 15,000 crore in year 2. In the two years it was spent very quickly and efficiently by the states. It was well received by the States. There has been feedback from states that it is very helpful for them to preserve capital spending during the pandemic, please continue and increase.
If you want capital spending to happen quickly, states are in a much better position to do that. Because they can do small projects scattered across the country in each district. The Center operates on some major axis projects such as national highways, railways, pipelines, telecoms, which have their own value but have a greater geographical distribution and a greater diversity of projects. It therefore has a good chance of being effective. So, we thought that in this push, part of it has to be done by the states, especially because of the positive reaction from the states at the meeting. They said give it to us and we will use it.
So this is a shift in stance on capital spending pushing it further across states?
We started in 2020-21. The Aatmanirbhar package was when we first announced Rs 10,000 crore capex for states. This continued into the second year and has now been expanded. It worked very well. They all spent it. It’s only for capital, they can’t spend it on anything else. It’s not crowding out, it’s not like a centrally sponsored system where if we give 60% they find 40%. They have nothing to find. We give them the full cost. So no state has a financial problem accepting this. And that’s beyond their normal borrowings, so it’s pure additionality without the need to take out existing resources. It is therefore obviously very popular. The only condition is that it is linked to one or two reforms sometimes and that it is linked to capital expenditure and cannot be used for social expenditure.
This drill could have a bigger multiplier because they could spend less on health and there would be more space to spend on it.
The budget does not seem to recognize those who are lower in society.
I think consumption restrictions prevent the wealthiest from consuming. The restrictions do not stop the consumption of the poor, which is affected by the lack of income. What I’m saying is that you have a force, which is the consumption of the rich and the middle class, which is stopped. It could very easily create a lot of jobs. These two-day curfew restrictions may have to go. Consumption must come from the wealthy in terms of volume. In an unequal society, a greater share of consumption comes from the better off. Say, I’m going to a restaurant, there’s someone standing there, I have to consume so that this person can find their job. Restrictions affect the consumption of those who can afford to consume.
I don’t neglect it or compensate for it by the fact that people have had income shocks and they can’t consume because they don’t have money. I admit that these two are not necessarily related. Most flagship programs continue. Gram Sadak Yojana is up 27%. Matching funding for Gram Sadak Yojana is allowed under Rs 1 lakh crore capital i.e. states capital. It is job creation, that is to say unskilled jobs in rural areas. What has not been done is a direct cash transfer. Apart from that, I think there are many programs. Nal se Jal has Rs 60,000 crore (expenditure), which has a lot of job creation effects in rural areas. This is a record expenditure for Nal se Jal, for PMAY. The government is trying to create real output through real jobs, not cash transfers.
For this (cash transfers), the bus was missed maybe after the first confinement.
International experience was the answer, it failed in most countries in terms of spending rather than saving. Look at the experience of developed countries, most of it is spared. It didn’t work even in the first wave, we had studies showing that in Jan Dhan’s accounts, 30-40% was saved, 70% was spent. If you want to generate demand and you have 100 rupees, you can either do 70 rupees of demand through cash transfer or 100 rupees of demand through government expenditure. And that 100 has a higher multiplier than 70. We believe the effects of spending on growth are better when it comes to direct government spending rather than income transfers. And the transfer of income has been managed more through the food channel and through existing welfare, welfare and safety nets, both central and state.
There is also a segment of the urban poor. Are the plans aimed at this segment?
Part of these investment expenditures in the States will be intended for urban areas. There is a component, which specifically has an urban component. This has been linked to certain reforms of building laws etc., but it is intended to generate urban projects. Amrut 2.0 has been launched. There is a considerable increase in it. We have some reform criteria that are easy to meet.