India’s new Chief Economic Advisor Arvind Subramaniam has pointed to the need for macroeconomic stability as an investment driver, which implies keeping the fiscal deficit, current account deficit (CAD) and inflation in check. Of these, the CAD has ceased to be a worry, more so with oil prices cooling; consumer price inflation has now fallen to below 7 per cent and wholesale price inflation to under 3 per cent. That leaves only the question of managing the fiscal deficit sensibly.

The days of pursuing a ‘trade-off between growth and inflation’ are all but over. Now, the problem is unequivocally about growth. Factory output has risen by just 3 per cent since April, over last year’s levels. A 12 per cent deficient South-West monsoon, generally viewed as a worry from a food inflation point of view, could also depress demand for industrial goods. It is worth considering whether the current fall in inflation is a result of tepid growth.

Subramanian should take a flexible view of the fiscal deficit in this scenario. Falling oil prices might shave off about ₹80,000 crore from the fiscal deficit, targeted at ₹5.3 lakh crore. Although the deficit so far this year stands at 75 per cent of this amount, it should not be a cause for worry. The oil price reprieve gives the CEA a chance to keep a demand stimulus going. Outlays on infrastructure, health, sanitation and education should be stepped up from current levels of 1.5 per cent of the GDP. The outcomes from the rural jobs guarantee scheme and Sarva Shiksha Abhiyan should be improved without cutting outlays. The same holds true for delivery of subsidised food. With the private sector weighed down by debt and banks by NPAs, the onus is on the Government to step up investment. As Paul Krugman constantly reminds us, let’s not be carried away by the deficit mongers when our problems lie elsewhere.

A Srinivas is Deputy Editor

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