Keep the fisc in mind

Govt cannot spend its way to economic growth

It is now clear that the Indian economy is undergoing a growth slowdown. Since early 2016, India has seen six successive quarters of slowing growth; the last data print for growth showed it had hit a multi-year low of 5.7 per cent, year on year, in the April to June quarter of 2017. It is, therefore, welcome that the government is finally showing signs of urgency and considering methods to revive the economy. After meeting his colleagues in other ministries, Finance Minister Arun Jaitley has said the government will take any “additional moves that are necessary” to this end and that he will unveil them after consultation with the Prime Minister. However, it is to be hoped that these measures correct policy errors and delays of the past, and are not merely additional spending.

Of late, several voices have called for more lax monetary and fiscal policy. Interest rates are set by the monetary policy committee of the Reserve Bank of India (RBI) and respond strictly to price-related signals. The RBI’s monetary policy committee has made it clear that, as far as the restoration of the high-growth path goes, the ball is in the government’s court. But looser fiscal policy would be dangerous too. The government has been at pains to establish the credibility of its fiscal consolidation path. Sequential policy documents, including the NITI Aayog’s three-year action plan and the medium-term fiscal framework, have reiterated the importance of keeping the fiscal deficit under control. A repetition of the “taper tantrum” of 2013, when the Indian economy teetered close to a balance-of-payments crisis, seems unlikely. Foreign exchange reserves are at record levels. But macroeconomic stability is fragile as long as it is dependent on stable and relatively low oil prices and steady inflows of foreign capital.

Now that the United States Federal Reserve has indicated that it will begin unwinding its extraordinary bond-buying programme, India must brace itself anew. Under such circumstances, abandoning fiscal restraint would be deeply irresponsible. In any case, the fisc is under pressure following the introduction of the goods and services tax (or GST). The new tax regime has caused a degree of uncertainty about the future revenue stream for both state and central governments. No new spending programme can be embarked upon under such uncertain conditions.

The focus should thus continue to be on the government living within its means, such as they are. The Centre must not replace a commitment to reform with a false belief that it can spend its way to growth. It has already demonstrated a weakness for such thinking in the past; but conditions, as the oil bonanza dries up, are now more difficult. There is no substitute, therefore, for working on structural reforms. It is to be hoped that, when consensus within the government is achieved, that it will be for deeper reforms, especially to labour, land, and agricultural markets, and not for a sizeable expansion of spending. Fiscal consolidation has been one of the prized achievements of the present government. This year the budgeted fiscal deficit of the central government is 3.2 per cent, which will fall further to 3 per cent in the following year. The expert committee on fiscal responsibility and budget management, too, has recommended bringing down the fiscal deficit to 2.5 per cent by 2023. Voices calling for a deviation from the path of fiscal consolidation must be ignored.