The government may claim that fiscal deficit targets are under control or not worrisome but NR Bhanumurthy, Professor at National Institute of Public Finance and Policy, would rather wait till June-July 2019 to see the numbers. “I think numbers will change when the full Budget is presented by the new government...and my guess is it will breach the government’s current fiscal deficit number of 3.3 per cent of GDP,” he said in a quick chat with BusinessLine . According to him how the fiscal arithmetic is worked out and how India adjusts to global slowdown will be key in 2019. Excerpts:

Year 2018 has been a controversial year as far as the economy is concerned. What are the challenges the government faces in 2019 on the fiscal management front?

I think it has to be looked at from a macro perspective. What will be most challenging is how to deal with overall expected slowdown in the global economy. There are lot of indicators that suggest slowdown and even IMF and World Bank have cautioned that we are going to see a kind of a cyclical slowdown in 2019. Some analysts are cautioning recession, maybe a milder one.

In fact, US stock markets have already reacted last week. So my guess is that world economy is entering into a slowdown phase and it has also been corroborated by declining intentional oil prices.

For those who are following the counter cyclical policies they might be pushed to increase their public expenditures to avoid the sharp cyclical slowdown. Those who are following the pro cyclical policies they will have to take the path of fiscal tighening. India largely follows counter-cyclical policies and, hence, might lead to widening of fiscal deficits.

Government is over confident about maintaining its fiscal deficit for the current year...

If you combine the latest GST decisions and bank recapitalisation then it will definitely have pressure on the fiscal in the current year. The governments will say so and need to be optimistic, they won’t say we are going to face any slowdown although right now there are clear signs of slowdown in India. My guess is that this fiscal deficit target of 3.3 per cent of the GDP is going to be a tough task. But, unfortunately the way we present our Budgets in the beginning of February, they would still show revised numbers close to 3.3 per cent as there will be less clarity on GDP Advance estimates based on just first two quarters’ information. We will have to wait for the actual numbers that will come much later. In my view the final numbers are going to be little more challenging for the government.

The banking sector has been a cause of concern for the government. Do you think the government is on the right track?

Banking sector issues were there since 2008 crisis. I think over a period of time the government, which is supposed to manage the banking sector in the current institutional framework, seems to have only aggravated it by getting into Mudra loans and farm loan waivers by various State governments.

While the RBI was trying to manage it in a slightly aggressive manner the government policies — both Centre and States — have aggravated the issues and this was further aggravated by demonetisation. Yes successive governments had a problem, the UPA II also had a problem, but i think the recent policies , especially demonetisation and rest, seems to have created more strain, which has serious implications on macro policies.

Institutional autonomy has been under attack...

Issues in terms of institutional autonomy have cropped up. The recent spate between RBI and the Finance Ministry has gone little too far, which could have been avoided. The RBI is one of our strongest institutions and there is a need to have functional autonomy. The two issues that disturbed the co-ordination between RBI and the Finance Ministry were PCA framework the reserves issue. Both are highly technical subjects, which, in my view, the RBI is better placed to judge and should be left to it. Indeed the differences seem to have occurred due to intellectual vacuum created especially after the exit of Arvind Subramanian.

2019 will be election year and 2018 very controversial...how much will the man on the street be impacted. The Government is keeping control on inflation but a mis-trust on numbers is there...

Inflation numbers are not as controversial as other numbers in my view. Inflation has differential impact on different sections of the people. If you bring it down too much it will create problems for farmers and producers and if it increases too much it has implications on the lower and middle class. Inflation is more of a double-edged sword.

What the central bank or the monetary policy committee is trying to do is to retain inflation at 4 per cent which is more or less a threshold level of inflation. To that extent MPC seems to have managed it, but now given the excesses in the fiscal side particularly on the loan waiver etc we have to wait and see how it will have an impact. My guess is that we might see another round of high inflation which is not uncommon after political cycles.

What do you think of trade numbers that have been coming in?

Trade numbers have been highly volatile and its just following volatility in international oil prices and also exchange rate. Across the three components — oil prices, exchange rate and trade — volatility is there. And all due to international oil prices. So i think we need to absorb this volatility, we don’t have much control on that. As global economy appear to be in downward phase, our exports could also slowdown in 2019

What are the four concern areas according to you for the fiscal management as we move into 2019?

For me the major concern is fiscal arithmetic and the quality of fiscal consolidation. I think that will be a major issue. Right now the Finance Ministry is maintaining 3.3 per cent number but we will have to wait for this when the new government comes and presents the full Budget. My guess is that we might see a very different number than 3.3 per cent in June-July when the full Budget is presented.

Second is the worsening of the banking sector issues where the central bank seems to be loosing grip after the recent spate with the government in terms of how to deal with it. Hope PCA would not become a history. That is scary.

Third in my view is employment. I don’t want to talk much about it because there is no right number. We just saw some numbers in the EPFO but it is going to be major issue as it has to be felt on the road.

Fourth, according to me, apart from the agrarian issues, how far and smoothly we are going to absorb the slowdown in the global economy will be a major issue.

comment COMMENT NOW