Chief Economic Advisor Arvind Subramanian feels that to move India towards its medium-term growth trajectory both supply-side reforms and demand management are required.
“On aggregate demand, both fiscal and monetary policy stances will need to be re-assessed to ensure that they strike the appropriate balance between the short-term need to spur demand, especially private investment and exports, and the long-term need of preserving fundamental macro-economic stability,” he had said in the Mid-Year Economic Analysis 2015-16. In a conversation with BusinessLine , Subramanian shared his views on the challenges fiscal consolidation pose to growth and why there needs to be a debate on the medium-term fiscal deficit goal post. Excerpts:
This is a political decision. All I am asking is, should we unconditionally and without discussion accept it or should we think about it as the circumstances have changed. I want to provoke a discussion.
We need to have this analysis: whether it is the right fiscal policy in these economic circumstances. What is the rationale for making such severe cuts in the deficit at a time when the economy has not taken off is the question.
So, for the next fiscal are we comfortable with a fiscal deficit target of 3.7 per cent of GDP or higher?
I think we need to have a cogent medium-term fiscal strategy. It has to balance the short- and medium-term policies. For the medium term, our debt-to-GDP must be on a sustainable path; we must have macro-economic stability. But in the short run we need to see whether to spur demand and also if we should have room for a counter cyclical fiscal policy… The decision to go with 3.5 per cent (fiscal deficit) is a very strong indication of a pro-cyclical policy. My job is to flag it and come up with an analysis that gives the calculus of the pros and cons and then everyone can decide.
Has the work on the analysis started?
The work is in progress. We will look at several components, including debt projections, five-year fiscal framework, future outlook and past performance, as well as growth multipliers such as investments and deficit.
This fiscal’s GDP projection has been revised downwards. Where will growth come from in the next fiscal?
This fiscal we benefited from a low oil price, which may not happen to the same extent next fiscal. This will actually have the impact of reducing growth by one percentage point. But, hopefully, exports and monsoons will be better and reforms will have some impact. However, if we impose fiscal consolidation, it will tend to reduce growth next year. So, we have to have a balance. We have to do the numbers much more carefully. That growth will recover is sure, but how fast is not certain.
In the analysis, you have made a case for reviewing the base year for wholesale price index (WPI). How will it help?
We don’t have good deflators for the GDP. We need what are called producer price index or the wage deflators. Especially for the services sector, we get the nominal numbers, but to get the real numbers, you need to deflate them with a price index. At the moment, we use a combination of the WPI and the CPI as deflators.
The analysis has a lot of pointers for next fiscal. Is it an academic exercise on what the next Budget should look at?
The next Budget will have to look at the whole medium-term fiscal strategy. How much will be the revenue, what deficit… all that has to be looked at. What are the accompanying supply-side reforms that have to be done? So, it has to look at two sets of big questions — policies to improve supply and policies to improve short-term macro demand.
Will we see any hard decisions in the Budget like widening of the tax base?
This is a decision which I don’t take. But what I can say is that it has to do with creating a good institution. In the course of development, more and more citizens become taxpayers and establish a relationship with the government. It comes not only through the political process of democracy but also through the economic process of paying taxes. If you pay income taxes, you feel you have a greater stake in the system and that’s what we ought to do.
Is the Centre still concerned about inflation?
We are within the RBI’s targets. Going forward, I don’t know what’s going to happen next year. How oil prices will behave. But there is a food issue, especially pulses where the government is trying to address via a pulses policy. Pulses and onions seem to be the new food problem. Onion prices could rise again and pulses saw a shortfall in both domestic and international production. But, I think, given the change in dietary habits, we are going to need more and more pulses. So, there has to be a long-term strategy to improve pulses production.