While the focus remains on economic fundamentals, the big question is — does the RBI have room for further rate cuts, and are the government’s fiscal deficit targets under threat? Bloomberg TV India spoke to Arvind Virmani, RBI’s technical advisory committee member and former Chief Economic Adviser of the government, on the fiscal and monetary policy outlook.

Amid extreme global volatility and uncertainty across the world, how do you see the Indian economy positioned at this time?

The global environment has been in focus and, as you say, it is quite uncertain. The one thing that concerns me is — too many people in policy circles look at the positives, which are definitely real and substantial. These are basically the decline in commodity and energy prices, of which we are net importers.

So that’s clearly a positive for the Indian economy.

We have to go back and see the reason for this. And the reason is the weakness and excess capacity in the global economy. International capacity has gone on increasing while demand has not kept pace. So there is an imbalance.

Now, I don’t know if it has grown imbalance but it has definitely remained the same more or less since the financial crisis, contrary to what everybody predicted. So, in that backdrop, it is very important to remember that this weakness in demand and global access capacity is affecting our own globalised part of Indian economy and that is not going to go away in the next year or two.

So any advantage we want to take of this requires that we be aware of both those aspects.

Now, in terms of the opportunities, it is really in the non-globalised parts of the economy which can use the net benefits of the lower prices — which is the relatively non-tradable sectors.

Where does the monetary policy fit in? How much room does RBI have to cut rates after Governor Raghuram Rajan slashed rates by 50 bps last month?

As I have been saying for about two years, when the inflation peaked at around 16 per cent, there was a huge, complete transformation of the inflation picture.

But even if we don’t take that 16 per cent peak and take the time where nominal repo rate peaked at 8 per cent in February 2014, since then the inflation rate — it was roughly 8 per cent at that point giving a zero repo rate— has declined by about 2.6 percentage points. And, as we know from the repo calculation now after this very bold and clearly desirable decline of 50 bps of the repo rate, we are still 1.25 percentage points below the rate at that point.

Remember I am taking a very conservative position. And that to me means that even playing it very safe, assuming the inflation rate will may go up by another 0.5 percentage points, you still got scope for another 75 bps.

We are seeing slow progress in divestment. Do you think we are at the risk of fiscal slippage right now?

I don’t know any other economists who after the budget wrote that the government should stick to the targets supported by the Finance Commission. Every other economist that I remember hearing said that there is scope to now expand deficit and use it to finance infrastructure investment.

I am still of the view that when you are in the position of global uncertainty, you are dependent on capital flows, it is very risky. It is much better to have fiscal credibility.

They did deviate somewhat from those targets but they are still planning to come back on it — that is the key now.

I must say that one must stick to the fiscal deficit target. One way to give a push to the economy is by changing the consumption investment mix — reduce the consumption elements and transfers in the budget and use that money to push infrastructure investment.

A change in this mix will give you a higher multiplier and positive impact on the economy.

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