Government can scale up spending to revive growth: Gita Gopinath
2 min read 20 Dec 2019, 01:54 PM ISTIMF chief economist says govt will have to come up with fresh steps to raise revenueMacro stability or stability on the fiscal front is very important for India, said Gopinath
PremiumThe National Democratic Alliance (NDA) administration, which is trying to reverse a deepening economic slowdown, could scale up public spending in the short term to support growth, said International Monetary Fund (IMF) chief economist Gita Gopinath.
The government, however, needs to find new revenue-raising measures to balance the higher spending, Gopinath said at the annual convention of the Federation of Indian Chambers of Commerce and Industry (FICCI) on Friday.
“First, it is important to keep in mind that when we speak about fiscal deficit, we also think of it as a medium term target, something that is to be achieved over a period of time, not necessarily overnight. Second, when we speak about the need for spending more on some issues that itself does not necessarily make a problem. The question is whether that is accompanied by revenue mobilization," Gopinath said in response to a question on whether the government needs to loosen its purse strings temporarily to support growth.
Gopinath stressed on the need for finding new revenue streams to balance any scaling up of public spending saying that macroeconomic stability or stability on the fiscal front was very important for India. “Keeping fiscal deficit to target is important. That involves revenue mobilization measures and rationalising of expenditure," said Gopinath.
The Modi administration has taken several steps in recent months to counter the slowdown, while the RBI gave a monetary stimulus by way of lowering its benchmark policy rates. India’s economy expanded by 4.5% in the September quarter, its slowest pace since March 2013.
Official data released earlier this month showed that the industrial sector remained weak with output shrinking by 3.8% in October. Although the contraction was less intense than in the previous month, the worrying factor is that production of consumer goods, such as cars and air-conditioners, contracted sharply by 18% in October, the fifth consecutive month of deceleration. Official data also showed that retail inflation continued to surge in November, fuelled by soaring food prices.
Gopinath said the stress in the non-bank lending sector has been more persistent and deeper than many had projected, while the uptick in the economy projected earlier was not taking place. Apart from the slowdown in investments, the other worry for India is rural income growth, she said. The transmission of the Reserve Bank of India’s (RBI) policy rate cuts into bank lending rates was “somewhat weaker than it was in the past". She also said the one reason for banks’ aversion to risk-taking was their concern about capital adequacy. That stems from the uncertainty attached to the value of a bad loan at the end of the bankruptcy resolution process, Gopinath added.
“When we look at data, there still seems to be stress in the non-bank finance sector," she said, attributing it as one of the problems affecting credit availability. She added that while reforms are carried out, India needs to offer certainty of regulations to the industry. “I believe that in the economic slowdown, regulatory uncertainty has played a role. That has to be addressed. It is important that India undertakes reforms, but it is to be done with clarity," said Gopinath. India’s indirect tax reform in 2017 with the roll out of the goods and services tax (GST) was accompanied by a disruption in businesses, as companies cut production during the transition to the new tax regime.
