Reforms on course despite second Covid wave: FM Nirmala Sitharaman

According to the calendar announced on March 31, the Centre will borrow Rs 7.24 lakh crore from the market in the first half of FY22, or just over 60% of the budgeted full-year target.

Finance minister Nirmala Sitharaman said on Thursday that despite the fresh challenges to economic management caused by the second, virulent Covid wave, key budgetary proposals including the creation of a state-owned development finance institution (DFI) and an ambitious agenda laid out for privatisation were very much ‘on course’.

Since the focus right now was on saving lives, vaccination and addressing the deficits in managing the Covid patients, the question of reliefs to economic agents like another loan moratorium was yet to be deliberated upon, she said.

Speaking at the first of a series of online, agenda-setting debates organised by The Indian Express and Financial Times, the FM said front-loading of borrowings by the Centre and states in the current fiscal would help harness the resources needed to keep momentum of public expenditure, including capex.

On the alleged protectionist twist in India’s foreign trade policy, she said tariff increases announced recently were aimed at arresting the influx of ‘end-consumer’ (finished) goods, where domestic capacities were robust. She stressed imports of raw materials and intermediate goods were not being targeted.

“We don’t intend to be regressive at all,” she said.

Asked whether the spike in Covid cases and the resultant localised lockdowns wouldn’t warrant a course correction regarding the Budget proposals, Sitharaman said even as some sectors were being affected due to the situation, the steps announced by the government to spur growth, including the institutional reforms, were unlikely be held back. “I will first focus on these measures (oxygen supply and supply of critical medicines), and then see how best the economy will have to be addressed. Although I’m monitoring the economy in a very detailed fashion on an everyday basis, at the moment I do not have a plan (on loan moratorium or other measures).”

As regards the prominent retrospective tax cases — Cairn and Vodafone — and New Delhi appealing against the international arbitration awards that went against it in both cases, the minister said although “we don’t believe in retrospective taxation,” the government couldn’t have taken any question on the country’s sovereign powers of taxation lightly.

India recently appealed against the Cairn Energy arbitration verdict at The Hague, challenging the $1.4-billion award. It had also appealed against another arbitration award in favour of Vodafone.

Referring to the meetings finance ministry officials and Cairn Energy CEO Simon Thomson and his team in February for an amicable settlement of the dispute, Sitharaman said, “I want to see how best we can solve the issue”. It is believed that the government wants Cairn to settle the dispute using the Vivad se Vishwas scheme; under the scheme, the company will have to pay around half the amount due sans interest and penalties in cases where the tax department has lost a case in a forum and filed an appeal.

According to the calendar announced on March 31, the Centre will borrow Rs 7.24 lakh crore from the market in the first half of FY22, or just over 60% of the budgeted full-year target. The planned borrowing is higher than 56% in the first half of FY21, when a Covid-induced lockdown prompted the government to expand borrowing substantially in the second half as well.

The Centre had also raised its gross market borrowing in FY21 to Rs 13.71 lakh crore, against the revised estimate of Rs 12.80 lakh crore, thanks to a drastic mismatch between the revenue collection and expenditure requirement in the wake of the pandemic. States were also allowed to borrow 5% of their GSDP in FY21, a small portion of which was linked to reforms. For FY22, states have been permitted to borrow up to 4% of their GSDP, 1% of which are linked to reforms.

Given the expected large supply of dated G-sec and state development loans in the coming months, as well as the likelihood of firming of global interest rates, yields are likely to rise in the absence of sizable and frequent open market operations. “In our view, the benchmark 10-year G-sec yield may harden to as much as 6.35% by the end of Q1 FY2022,” Aditi Nayar, principal economist at Icra, wrote.

The government expects the proposed DFI to raise low-cost funds for long-term infrastructure financing; it is expected to mobilise as much as Rs 3 lakh crore over the next five years, leveraging initial capital of Rs 20,000 crore. Initially, the government will fully own the DFI but, as more investors join in, it is willing to dilute its equity to 26%.