Gurumurthy calls for funding fiscal deficit to support economic growth

Reserve Bank of India (RBI) board member S Gurumurthy on Friday favoured funding the fiscal deficit to support economic growth at a time when banks are going through stressed times.

“Bank credit to gross domestic product (GDP) ratio was down from 10.9 per cent in 2010 to 5.7 per cent in 2015 and 4.8 per cent in 2016. Fiscal deficit also came down in this period. With the result, the aggregate money in the economy halved from 17.4 per cent of the GDP to 8.4 per cent. I suggested to the government that when credit goes down deficit should rise,” he tweeted.

The comments by Gurumurthy, co-convenor of the Swadeshi Jagran Manch, comes days before the RBI’s crucial board meeting on Monday. The issues raised by the government, including the easing of PCA norms, cutting the size of reserves and enhancing credit to MSMEs, are likely to come up for discussion at the meeting.

He added, “I suggested the amendment of Fiscal Responsibility and Budget Management (FRBM) law. A committee was also appointed. The FRBM law has become outdated after 2008. Monetary expansion is now the order of the day. Financing of deficit is not bad, per se. In times of banking stress, it is good.”

The IMF said in 1999 that deficit was preferable to the government borrowing from banks and crowding out private investment which are happening in India in a big way.

Had India not followed theoreticians, it would have fared better. The US & EU ignored theoreticians in 2008 and survived.

He quoted that Abenomics in Japan are against all theories and this is a success in generating business, jobs and exports in Japan.

“It is because they think independently. Here, we troll anyone who thinks independently. Independent thinkers have always struggled against howls of crowds.”

In India, the source for money supply is dollar inflow into the country. If the dollar flows out, money supply contracts. Can national economy work on this logic? Is anyone thinking. When I say money supply, it is about monetary expansion, said Gurumurthy.