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India’s government can offer fiscal stimulus to support economic growth in its budget next week without worrying about it being inflationary.
That is according to Kapil Gupta, an economist with Edelweiss Securities Ltd in Mumbai, who said that a weakening economy and a possible US interest rate cut provide scope for India’s authorities to lift spending.
“Such a move would not undermine inflation goals either,” he said, citing historical evidence and, besides, consumer prices are more tied to what happens to food costs.
Gupta’s view runs counter to the argument of Reserve Bank of India’s outgoing Deputy Governor Viral Acharya, who recently warned of inflation risks coming from rising government and public sector borrowings.
Finance Minister Nirmala Sitharaman will give her maiden budget speech on July 5 under pressure to spur growth from a five-year low.
Also read:To spur economy, RBI cuts repo rate by 25 bps to 5.75%
“Historically, a fiscal push supported by monetary easing has lured rates lower,” Gupta said. “This looks probable even now with the Federal Reserve on the cusp of an easing cycle. Meanwhile, domestic inflation outlook is more correlated with global food prices, which remain benign. Hence, for now, reflation should be prioritised over reforms.”
The Reserve Bank of India has cut rates by 75 basis points so far this year to take the repurchase rate to a nine-year low of 5.75 per cent. It is likely to ease further as inflation has stayed below the RBI’s medium-term target of 4 per cent in 2019. Underlying price pressures, which highlight demand for goods and services, are also waning.
Also read:Fiscal deficit at 52% of full year target in first 2-months
That might give the government room to boost spending. While the government has failed to stick to its fiscal gap targets in the past few years, it has not strayed much, with the budget deficit pegged at 3.4 per cent of Gross Domestic Product this year.
“The domestic slowdown has spread to consumption, while investment and exports remain weak. The global economy too is losing momentum,” Gupta said. “This warrants a fiscal response.”
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