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Economists worried over fiscal stimulus, urge RBI to cut rate

By Indivjal Dhasmana
June 03, 2019 14:26 IST
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Economists have said if a stimulus is needed it should be different from what was provided in 2008-09, when the economy faced the ripple effects of a global meltdown following the Lehman Brothers collapse.

Illustration: Uttam Ghosh/

Economists have cautioned the government about a fiscal stimulus to revive the economy, whose growth had plunged to a five-year low of 5.8 per cent in the fourth quarter of 2018-19.

They have said if a stimulus is needed it should be different from what was provided in 2008-09, when the economy faced the ripple effects of a global meltdown following the Lehman Brothers collapse.


Some economists said a stimulus should not be given now.

Arvind Panagariya, former NITI Aayog vice-chairman and professor of economics at Columbia University, said: “Any talk of fiscal stimulus is ill-advised.

"The government must stay the course on fiscal consolidation.”

He said if it expanded borrowing to finance a stimulus, it would crowd out private investment, which is more productive and efficient.

Instead, he advised that the RBI must seriously consider knocking down the interest rate by 50 basis points.

The RBI’s Monetary Policy Committee will meet this week to take a call on the policy rate.

He said incremental changes of 25 basis points lacked the necessary signal value.

“Besides, our inflation target is a range: 2 to 6 per cent. But, the RBI seems to interpret it as 4 per cent or less.

"In a growing, developing economy, some inflation is healthy, indeed necessary, to allow relative prices to adjust to help investors to tell rising sectors from declining ones,” he added.

Economist Lord Meghnad Desai advised against panic, saying one should not be too worried about temporary variations in the numbers.

“Temporary fluctuations in quarterly GDP growth rates should be taken as normal.

"I know there seems to be a trend but even so the level over four quarters is not too much down on the previous four years.”

He said there was uncertainty about the election and corporate and private spending plans got postponed under such circumstances.

The extra spending during elections will come in soon in the data, he said.

“These are preliminary data and they always get revised. They may make political news but not much economic sense.

"Ideally we should look at a four-quarter moving average rather than a financial-year average,” he advised.

The new government has made a great choice in appointing Nirmala Sitharaman finance minister, Desai said, adding she had worked in the private sector in the asset management area.

“She has to take a look at the data. There is no need to panic. She has to present the Budget soon as the February Budget was just a vote on account. She can give the right message,” he added.

Devendra Pant, chief economist at India Ratings, said the government should not give the kind of consumption stimulus as in 2008-09.

The stimulus should be given in a way that does not stay long in the economy.

“In other words, stimulus should be based on capital expenditure and not on consumption,” he said.

Pant said while any kind of stimulus could be a short-term measure, the government should look at long-term measures to sort out structural issues.

For instance, the government should look at household savings, which have been dwindling, by increasing loans to small and medium enterprises, boosting the real estate sector, resolving price collapse issues in agriculture, etc.

YES Bank chief economist Shubhada Rao said though election-related uncertainty was behind us, the government needed to act steadfastly to revive rural consumption, incentivise capex through public-private partnerships and move towards a further dilution of stake in public sector units.

In this backdrop, Budget FY20 will be keenly watched to assess the near term focus of the government to revive growth, she said.

Rao also said the government could not give up the fiscal consolidation path.

The government had pegged its fiscal deficit at 3.4 per cent of GDP for FY20 in the interim Budget, the same as in the previous year.

Soumya Kanti Ghosh, chief economic advisor at the SBI group, said the heavens would not fall if the fiscal deficit widened to 3.5 per cent for FY20.

He said any such slippage should be used for increasing capital expenditure and the government should be transparent about it and avoid off-Budget borrowings.

He said the government should rather focus on the structural fiscal deficit.

Divestment proceeds and non-tax revenues have nothing to do with economic growth and should be done away with while calculating the fiscal deficit, he said.

D K Srivastava, chief policy advisor at EY, suggested creating a stabilisation or counter-cyclical fund, which should be operated by a special purpose vehicle.

He said the fund, where 0.6 per cent of GDP be parked, should be used to perk up the economy at a time of slowdown.

That means Rs 1.14 trillion in terms of the size of the economy in FY19.

Fourth-quarter growth pulled down the GDP growth rate to 6.8 per cent in FY19, the lowest in the Modi government’s first stint.

Growth was lower than even the 7.2 per cent pegged by the first advance estimates and 7 per cent by the second advance estimates.

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Indivjal Dhasmana in New Delhi
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