New Delhi: India needs to check inflation and its burgeoning fiscal deficit, even if it means compromising a little on economic growth. Simultaneously, spending on education and health must be enhanced to equip people with the skills they need to benefit from growth. These were some of the views expressed at the New Delhi leg of Mint Budget Agenda 2010, at which panelists debated the issue “Policy: Growth or Stability?”
The panelists were Jahangir Aziz, India chief economist, JPMorgan Chase and Co.; Partha Mukhopadhyay, senior fellow, Centre for Policy Research (CPR); Rajiv Kumar, director and chief executive, Indian Council for Research on International Economic Relations (Icrier); Pronab Sen, chief statistician of India; Suman Bery, director, National Council of Applied Economic Research (NCAER); and Anil Padmanabhan, deputy managing editor, Mint.
Tamal Bandyopadhyay, deputy managing editor, Mint, who moderated the 18 February discussion, started by asking the panellists if growth could be sustained without government spending. Edited excerpts:
Jahangir Aziz: Let me start by trying to dispel a myth. We all talk about this massive stimulus that was provided after the (financial) crisis. In reality, there wasn’t very much...when the budget came out, what it did was to allow all the automatic stabilizers of the economy into play... The big push in the budget that took place, took place in the two fiscal years before that. I don’t think we provided any real discretionary stimulus in the post-crisis period.
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Suman Bery: I don’t actually see a trade-off between growth and stability. I think India is very much a bicycle that remains stable by growing fast.
Rajiv Kumar: ...The question is what speed you want to run. If you want to start running at 8-9%, you will not (be able to). Therefore, let’s get some semblance of normalcy. I would hope the finance minister would say: “Guys, I don’t mind this economy growing at a per cent less next year. But I want all parameters and variables looking normal as I go forward because that is what is going to give everybody confidence in me.” I think there is a trade-off between growth and stability at this point in time. At the moment, inflationary expectations in the economy are getting out of hand, and I think the government and RBI (Reserve Bank of India) are probably behind the curve already.
Pronab Sen: I like the level of confidence in this panel. Frankly though, the level of hard data we have seen and feedback from the market doesn’t justify this level of confidence. Insofar as private investment demand is concerned, it is going no place. We get excited by the numbers that come out, 40% growth in capital goods sector, therefore, private investment demand has picked up...complete rubbish. Exports, we are in positive territory. Whoppee!
We have been in negative territory for 13 months and how big a base effect you want. If that is (the) case, what we need to do is to think about not just the real impact of what the government does, but the psychological impact as well. What’s been the psychological consequence, it could be many times larger (than real consequence) and none of us has any idea what these consequences are.
Jahangir Aziz: I think investment cycle has to turn around and confidence plays a big part in turning around investment cycle.
Suman Bery: And a debt-to-GDP (gross domestic product) ratio of 90% is what inspires confidence?
Jahangir Aziz: I think we overplay the debt-to-GDP ratio.
Rajiv Kumar: Investor confidence will not be helped by this government being seen as a free spender. It will be much more helped by this government being seen as a reformer.
Anil Padmanabhan: There is a definite sense of uncertainty about us. The earlier normal is gone. You have a normal which we don’t know what it will be. Structural reforms when you don’t know what is down the line...he (Sen) is signalling there is (a) certain disquiet looking ahead. I think it is important to signal I am serious on fisc, but don’t take it to the other extreme.
Jahangir Aziz: The reason why India’s fiscal deficit or fiscal debt isn’t alarming is not because a large portion of it is domestic. It is because we have repressed the entire financial system. Hundred basis points rise in real interest rate declines growth by about 60 basis points. I am much more concerned about the deficit number because it takes away the space that the corporates are going to have to go into the market.
Pronab Sen: I don’t think debt-to-GDP ratio is an issue as far as broad macro policies are concerned. I think it is the change in debt-to-GDP ratio that is more relevant. You should look at fiscal deficit relative to some measure of potential savings in the economy. Now, corporates are making money, they are not investing it, they are stashing it away in banks, and if the government isn’t soaking it up you are creating a financial sector problem. What on the earth are you going to do with excess corporate savings? I would much rather (have) the government borrowing it.
How to curb high government expenditure
Pronab Sen: There is a huge political compulsion that goes into that area (high level of government expenditure). But frankly, unless there is a general consensus, you could at most get one-year breather as most elections are a year from now. But come election-time budget, all those subsidies will be back in one form or the other. But health expenditure by government needs to go up at least by 2-2.5% of GDP, expenditure on education should go up at least by 0.5-1.5% of GDP.
Rajiv Kumar: Public expenditure-to-GDP ratio has to be raised in India; it is low. In a democracy like ours, you got to have transfer payments, you got to take care of social sector spending. So my focus will be still on revenue side. You got to have more compliance. You need to focus to increase your revenue-GDP ratio. And why can’t we have an inheritance tax in this country?
Suman Bery: I don’t think there are magic bullets on the expenditure side. So the fiscal adjustment has to take place on the revenue side. It will be basically growth driven. Therefore, there is no trade-off between growth and stability. We can only be stable with growth. The deregulation agenda will unleash the growth drivers.
Coordination between monetary and fiscal policy
Pronab Sen: There are times when both move together. There are times when they go apart. Last year, they had to move together as all the signals were pointing towards that direction. At this particular time, if you ask me, they need to move in different directions.
There are two completely different sets of signals in the market and, therefore, they need to react differently, which does not mean that there is no policy coordination. In fiscal policy, flexibility is limited because of the huge political message that goes out of fiscal policy, whereas monetary policy practically carries no political message. So fiscal policy is for political management and monetary policy is for economic management.
Jahangir Aziz: I disagree. I think this is (the) time monetary and fiscal policy move in same direction. The Reserve Bank of India is moving from an easy monetary policy to a neutral stance, the government also needs to move from easy fiscal stance to a neutral one. I am not talking about tightening, but neutral stance.
Rajiv Kumar: We don’t have the model of governance at the local level, but we just have to do it. We have to create capacities at the lower level because you cannot govern this country from one single location... So whatever it takes, you have to because the delivery of goods and services is so bad in large parts of this country, that it is a major cause for us not making much progress on the equity side.
Partha Mukhopadhyay: The argument that you don’t have capacity cannot be an argument for not going down. You will have a lot of corruption... It is an important part for evolution of a democratic society. This is the messiness that we have to learn to live with initially.
Forecast for next year’s GDP, fiscal deficit, inflation and interest rate
Jahangir Aziz: GDP: 8%; fiscal deficit: 5.7%; inflation: 6%; policy rate: 4.75%
Anil Padmanabhan: More or less I agree with Jahangir. On growth side, I am little more conservative. I would say 6.5-7%.
Suman Bery: GDP: 7.5-8%; inflation through GDP deflator: 3.5%. There would be monetary tightening of 100 basis points.
Partha Mukhopadhyay: 6.5% for all four.
Rajiv Kumar: GDP: 7.5%; fiscal deficit: 6% and above; inflation: 7%; interest rate tightening by 150 basis points.
Pronab Sen: As the chief statistician of India, I do not permit myself to forecast on GDP and inflation. As far as fiscal deficit is concerned, I do not want to make a forecast. 5.5% is what has been promised and that will be. On interest rate front, I tend to agree with 150-200 basis points increase in policy rate. But in the middle of the year, monetary easing may be possible for the very simple reason (of) another base effect kicking in.
Photographs by Pradeep Gaur / Mint