Scope for stimulus despite fiscal consolidation target, says Ashima Goyal

It is necessary to take prompt action against the ongoing stress in the NBFC sector and its spillovers in the short term, says EAC-PM Ashima Goyal

The newly elected NDA government has its job cut out. With the economy possibly headed for a slowdown, there is a debate on whether the government needs to provide a stimulus. But then, there is a question of resources as well. Ashima Goyal, member of the prime minister’s Economic Advisory Council, tells Joydeep Ghosh that reversing the pre-election slowdown in government spending and frontloading the expenditure planned for the year can provide some relief. Edited excerpts:

During the last few months, there has been a lot of talk about a slowdown in the economy. Do you agree with this assessment?

Yes, I do. Particularly worrying are the signs of fall in investment, which had revived in end-2017 after many years. Policymakers may believe that private investment will revive now since election-related uncertainty is over and foreign money will pour in. But private investment growth has stagnated since 2011. There was a brief recovery of animal spirits after the last election, but high real interest rates and the asset quality review made bank lending to firms negative and squeezed out the revival. Something similar should not happen this time. Fast action can prevent such a possibility.  

Both FMCG and auto companies, especially two-wheelers, are showing signs of a slowdown. What is causing this distress?

The latest data shows a fall in private investment and durable consumption as real interest rates have risen and liquidity remains tight. As credit growth from public sector banks slowed, non-banking financial companies (NBFCs) had stepped in. But since September 2018, there is a slowdown in credit growth from NBFCs. Bank lending has improved but banks are not refinancing NBFCs, despite the RBI making it easier for them to do so since they are afraid of credit risk and having to make provisions. There are also external shocks from the global slowdown and from trade wars. Typically, election spending gives a consumption stimulus, but it is not there this time as the slowdown in government spending over the long election season has dominated.

There is considerable talk that the economy needs a stimulus? Do you agree? And in what form can this stimulus be given?

To stabilise a cyclical slowdown, the standard policy prescription is counter-cyclical fiscal-monetary stimulus. The monetary policy has considerable room for rate cuts, together with a rise in the provision of durable liquidity, since headline inflation is within the target band, core inflation has fallen, and growth is slowing. Although the government is on a path towards fiscal consolidation, there is limited space for a fiscal stimulus. The pre-election slowdown in government spending can be reversed and expenditure planned for the year frontloaded.

In 2014, the government inherited a fragile macroeconomic environment, with double deficits threatening outflows, and high inflation. In an over-reaction, fiscal and monetary policies were too strict. Since macroeconomic parameters are stable now, there is a scope for relatively balanced policies.  

The government's finances are strained currently. So, even if there is an overall thought that stimulus should be given, where will the resources come from?

GST simplification is one reform on the anvil but despite this and possible tax cuts, revenues from GST are expected to rise as information already obtained is acted on intensively after the election. Some government schemes implemented over the last five years are nearing maturity and money is available for re-allocation. Privatisation plans in the pipeline can be acted on quicker as the markets have revived after the election and foreign portfolio flows are coming in.

What are the other options in front of the government to revive growth?

The government will act with renewed vigour to implement its manifesto, which aims to improve conditions of supply, lower costs through the economy, making living and doing business easier while relieving sectors in distress. The focus is on improving capabilities, strengths and risk-taking abilities.

All this will be able to attract more FDI as it leaves China under the current trade war. Expenditure on low-income housing 

and other infrastructure will create more jobs. Such expenditure on non-tradables retains more of the stimulus internally, and is, therefore, especially appropriate during a global slowdown. 

What steps are required for resolving the NBFC crisis?

It is necessary to take prompt action against the ongoing stress in the NBFC sector and its spillovers in the short term, while in the longer term, regulations can be strengthened. The RBI did not want to open a special liquidity window to NBFCs because of credit risk. It believes weaker NBFCs should be allowed to exit since rescue creates moral hazard. But the growth slowdown indicates continuing systemic risk against which the RBI has to act. Measures taken so far have turned out to be inadequate. Even stronger NBFCs, in the current environment, are choosing to sit on a fat liquidity cushion rather than lend. If a temporary RBI liquidity window is made available against collateral with high rates, it may not be used much but the fear of liquidity shortage would disappear, allowing NBFC lending to revive, even as over the long term, action is taken to resolve the asset-liability mismatch that should not be allowed to drive potentially solvent but illiquid institutions into bankruptcy.