It’s now RBI’s turn to stimulate the economy

Mehak Kasbekar | Updated on January 20, 2018 Published on February 29, 2016

ARVIND PANAGARIYA NITI Aayog vice-chairman   -  The Hindu

On the fiscal deficit, the Finance Minister has delivered on what he was expected to

Putting to rest all speculation that the Finance Minister Arun Jaitley may deviate from FRBM path, the Budget has projected fiscal deficit at 3.5 per cent of GDP.

Speaking to Bloomberg TV India, NITI Aayog vice-chairman Arvind Panagariya says it is the turn of the RBI to cut rates and stimulate the economy. A higher GDP growth of 7.6 per cent estimated for FY16 is indicative that investment scenario is not that bad after all.

The Finance Minister has acknowledged that the priority is rural spending and agriculture this time. It is a Budget for Bharat as we are calling it. Do you agree?

Most definitely. It is a well-rounded Budget. So it definitely covers all sectors very nicely. But, if you were to ask one area of big emphasis, it is Rural India.

The fiscal deficit roadmap has been stuck to 3.5 per cent for FY17, the number which everybody was watching out for. Do you agree with the Finance Minister that growth is not being sacrificed to stick to the fiscal roadmap?

There has been a debate on whether the Finance Minister would breach the 3.5 per cent fiscal deficit target or not. I was of the view that he should not for a couple of reasons that we made the commitment only last year.

Now, if you, really, within a year, with no crisis issues, change that, it will undermine the credibility of the government. So that was clearly one reason.

If, of course, there was a crisis situation, then clearly you breach and the markets will understand. But under normal circumstances, breaching the deficit target within a year is going to undermine the credibility of the government.

The second reason is that some of the stimulus to the economy should come from the Reserve Bank of India.

The Finance Minister breached the fiscal deficit target, it certainly would have given the central bank a reason to become much more cautious. So, I am hoping that some of the stimulus would come from the RBI.

The ball now is in the RBI’s court and the government would be expecting more rate cuts?

Because the RBI Governor Raghuram Rajan himself has lobbied in favour of 3.5 per cent fiscal deficit for the FY17 Budget. The finance minister has delivered on what he was asked to deliver. Now it is the turn of the RBI.

What would you say to India Inc’s demand that the maximum amount of investment has to come from the government?

If the government does not borrow more than a certain amount, it leaves more room for the private sector to borrow and finance its investment.

So, certainly for the corporate sector, this is good news. And the fact that interest rates might come down is also good news. The government, through the Budget, has done nothing that ought to come in the way of private sector investment.

On the other hand, we know that a majority of the private sector and banks are still stressed. And, therefore, some of the heavy-lifting has to be done by the government.

The public sector has received a boost in the Budget for the second year in the row. Last year also the public sector units (PSUs) carried the heavy burden.

But, I think I am quite optimistic in the coming fiscal year FY17; we will see the private investment in particular getting revived as well.

We have seen 125 basis points cut in policy rates by the RBI in 2015 but are yet to see growth following. We are yet to see that kind of growth following the monetary easing. What are your views? Do you think the RBI Governor needs to do more?

Remember that investments have actually held up. If you look at the total investments in the economy, it is about 31-32 per cent of the GDP and a significant amount has held up. It has still not climbed up because our previous peak prior to the global financial crisis was in 2007-08, which was about 35-36 per cent. We haven’t got there yet. But investment is picking up to the extent that the Government itself is holding the fiscal deficit down and the scope for the private sector investment remains.

So, the thing is that we often hear a lot more from the sectors that are stressed. We do not hear as much from the sectors that are doing well. As a result there is a narrative, which tends to dominate that investment is not picking up. That 7.6 per cent GDP growth, as projected by CSO, is coming from somewhere.

In fact for the fourth quarter, the advance estimate for growth has been 7.8 per cent, which is very close to the 8 per cent magical number.

Published on February 29, 2016
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