Orthodox fiscal and monetary policies, with their sole focus on reducing fiscal deficit by a specific percentage of gross domestic product (GDP) and maintaining inflation, were criticised by speakers at the annual general meeting of the Confederation of Indian Industry. Think "out of box" when framing these policies was the suggestion by the speakers to the government.
While NITI Aayog vice chairman Rajiv Kumar limited its criticism to fiscal policies, economist and former chief economic advisor Deepak Nayyar opposed fiscal and monetary policies currently in practice in the country.
Private sector participants echoed some of these views. UTI Asset Management Managing Director Leo Puri said successive governments had not had a good track record of efficient deployment of capital expenditure.
Limiting the fiscal deficit to a particular percentage of GDP has become so sacrosanct that even the finance ministry does not reject it, Nayyar added. He compared the current state of fiscal policies to a "thermometer" as any policy above a specific number is termed abnormal. "Thermometer cannot diagnose the disease. Similarly accounting of fiscal deficit number cannot by itself diagnose the problems faced by the economy," he said.
Fiscal policies should be aligned to overall objectives in the economy and have to be counter-cyclical. If the economy is in the boom, contractionary policies are required. If, on the other hand, the economy is in recession, expansionary polices are needed, he said. He wondered if government borrowings could be used for productive investments. He asked if the rate of return was higher than the cost of repaying debt, what was the harm in increased borrowings from the market?
In practice, he said not all borrowings would go for productive investments, but some would be used for revenue expenditure. If that part of the borrowings used to fund non-revenue expenditure yields high returns so that it exceeds repayment costs of overall debt, then borrowings should be resorted to, Nayyar said.
Government expenditure does not always crowd out investments, but also crowds them in, he added. He took on "orthodox" monetary policies which focus only on inflation. The Reserve Bank of India is determined to follow this policy only, he said.
The role of monetary policy is not only containing inflation but also efficient use of resources. For an instance, he said investment to GDP ratio in India was way behind what it used to be six years ago.
Rajiv Kumar agreed with Nayyar and put forward his oft-repeated theory of containing revenue deficit, instead of overall fiscal deficit. He said a committee, headed by former Expenditure Secretary N K Singh, refused to focus on revenue deficit since it said education and health also comes under revenue expenditure.
So, the solution is not to abandon revenue deficit, but to include health and education in capital expenditure. He said one must consider the economy's requirement to orient policies.
For instance, one can imagine what would be the condition of the economy if the government had chosen to strictly follow the fiscal deficit path even as the private investments were not forthcoming. Investment cycle was turning upwards, he added. Kumar said with the goods and services tax and demonetisation yielding better tax collections, fiscal reserves should be built to fall back for the rainy days. He said the result of "orthodox" fiscal policy was some expenditures were kept below the line. "I would say be innovative, but be honest in showing accounting of fiscal deficit," he said.
Leo Puri said the main problem did not lie with fiscal targeting but with the inability to spend efficiently. Kotak Mahindra Bank Managing Director Uday Kotak said Aadhaar was a gamechanger for India in terms of financial technology. Once the current legal issues surrounding it are sorted out, it will continue to be an asset in financial inclusion, he added.
"For the first time, you have an identity data base which is not owned by any private player. It is owned by the public. In China, private players such as Alibaba and Tencent have that role, while in the United States, Facebook and Google have such data. In India, Aadhaar can boost financial services technology," Kotak said.