Mumbai: Economist Shankar Acharya, a member on the board of governors at New Delhi-based think tank Icrier (Indian Council for Research on International Economic Relations), has called for a smaller fiscal deficit in next month’s Union budget. “A small reduction in fiscal deficit will not hinder growth. The cut, in fact, will enhance growth,” he said in an interview. Edited excerpts:
The first rumblings have started about the Union budget. There is already a news report suggesting that service tax and excise duties might go up. Would you look at in a positive light, that at least the fiscal deficit problem is beginning to get addressed, or would you be worried about growth?
I first want to see what the budget does. These rumblings are nothing more than various people giving their speculations and conjectures. The time has come in this budget to begin to shrink our record fiscal deficits. I always keep reminding people that fiscal deficit is nothing but scale of government borrowing. If you want things like interest rates to stay manageable and not too high, we just have to tackle fiscal deficits.
Budgetary expectations: Icrier member Shankar Acharya.
In numerical terms, I would be looking for Central government fiscal deficit in this coming budget which is somewhere between 5.5% to not more than 6% of gross domestic product (GDP), as pretty much the minimum requirement to have some credibility that we are once again trying to get on to a fiscal consolidation path. What instruments that requires—whether it’s a revision upwards of excise duties or service tax or reduction of subsidies by increasing prices in the areas like food, fertilizer and fuel or more disinvestment—is up to the government (to decide).
Do you think revenues might actually go up significantly and that might bring down the deficit without leaning too much on the government’s expenditure front, and also the fact that there is a significant amount of disinvestment happening where capital receipts might also go up?
In the current fiscal year, people are saying that the rate of growth will be around 7.75%, which is much higher than what people were expecting six months ago. The tax revenues this year have not been all that buoyant. Going forward, if growth is once again 8% or even a little more than 8% in the coming year, to expect a huge jump in tax revenues simply because of a slightly higher growth rate seems to be being overly optimistic, which leads me to the conclusion that you do need to revise upwards. The very large reductions in excise duties were done about a year ago.
How much would it cost growth?
The stimulus, which was put into the economy both this year and last year, certainly has helped to keep growth fairly buoyant. But at the same time, now the danger is that if you do not reduce at least the fiscal gap, the fiscal deficit, you are going to see rising interest rates for medium and long-term bonds, which could turn out to be a dampener for growth. For that reason, it is a judgement call and my judgement is that you need to do some reduction—not a huge one but some reduction in the fiscal deficit. I do not think that will hurt growth. On the contrary that will be growth-enhancing in the horizon of a year or two.
The Reserve Bank of India (RBI) and the finance ministry are independent bodies though I imagine they would be conferring on a regular basis. Do you think both will have a bit of a tightening slant, RBI on the monetary front because of inflation and finance ministry on the fiscal front because of the deficit issue, or will they confer and say if we tighten the screws both on the monetary and the fiscal front, we risk giving up a lot of growth and that may be dangerous.
A little bit on both sides will help. It will not be a good thing if the fiscal deficit remains more or less unchanged at these record high levels. Everyone then says whatever tightening has to be done has to be done by the central bank because then it becomes very difficult for the central bank to conduct monetary and macro-economic policy on its part, especially in a context where you have fairly abundant capital inflows and you are faced with having to manage a massive government borrowing programme.
So, as you hinted, some modest tightening action or beginning of exit from stimulus is necessary from both the fiscal side and the monetary side. On the monetary side, in the last policy, the ground was laid for it. This will happen in a couple of weeks or 10 days from now.