India has scope to boost Budget without stoking inflation, says economist

Gupta's view runs counter to the argument of RBI's outgoing Deputy Governor Viral Acharya, who recently warned of inflation risks coming from rising government and public sector borrowings

The government can offer fiscal stimulus to support economic growth in its Budget next week without worrying about it being inflationary.

That’s according to Kapil Gupta, an economist with Edelweiss Securities Ltd. in Mumbai, who says a weakening economy and a possible US interest rate cut provide scope for India’s authorities to lift spending. Such a move wouldn’t undermine inflation goals either, he said, citing historical evidence and, besides, consumer prices are more tied to what happens to food costs.

Gupta’s view runs counter to the argument of Reserve Bank of India’s outgoing Deputy Governor Viral Acharya, who recently warned of inflation risks coming from rising government and public sector borrowings. Finance Minister Nirmala Sitharaman will give her maiden budget speech on July 5 under pressure to spur growth from a five-year low.

“Historically, a fiscal push supported by monetary easing has lured rates lower,” Gupta said. “This looks probable even now with the Federal Reserve on the cusp of an easing cycle. Meanwhile, domestic inflation outlook is more correlated with global food prices, which remain benign. Hence, for now, reflation should be prioritized over reforms.”

The Reserve Bank of India has cut rates by 75 basis points so far this year to take the repurchase rate to a nine-year low of 5.75%. It’s likely to ease further as inflation stays below the RBI’s medium-term target of 4% in 2019. Underlying price pressures, which highlight demand for goods and services, are also waning.

That might give the government room to boost spending. While the government has failed to stick to its fiscal gap targets in the past few years, it hasn’t strayed much, with the budget deficit pegged at 3.4% of gross domestic product this year.

“The domestic slowdown has spread to consumption, while investment and exports remain weak. The global economy too is losing momentum,” Gupta said. “This warrants a fiscal response.”