Montek Singh Ahluwalia pushes for ‘fiscal stability council’

Noted economist and former Deputy Chairman of the (erstwhile) Planning Commission, Dr. Montek Singh Ahluwalia, has called for the setting up of a ‘fiscal stability council’ – a measure, he says, has been suggested by many experts before, including the N K Singh Committee on Fiscal Responsibility and Budget Management.

In his speech on ‘India’s Growth Prospects for the Next Decade’, which was organised by the Triplicane Cultural Academy, Dr. Ahluwalia said that the ‘fiscal stability council’ should consist of eminent people who are not permanent government employee. After every budget, the council would give a report to the Parliament saying “this is how we see the fiscal situation coming out”.

Noting that all governments in the recent past have hidden deficits, Dr. Ahluwalia said that people ought to be made aware of the correct situation. For fiscal discipline to set in fully, there is a need for an institutional set up and an independent ‘fiscal stability council’ could be such an institutional set up. He stressed that the council by itself would not set everything right— for after all, a finance minister could well say that he would bust the fiscal deficit in order to fund schemes for the poor and get cheered for it—but the council, by being a sort of an independent evaluator, would help.

Dr. Ahluwalia highlighted the two big issues defining the Indian economy today are jobs and agrarian crisis. He noted that these two can be solved only by achieving high growth. The agrarian crisis, he said, was not because the farmers could not produce enough, but because the prices have collapsed and that was because the economy could not absorb the higher agricultural output. Such absorption can happen only with higher growth. Further, higher growth will enable agricultural labour to move out of agriculture into more paying jobs, and there would be fewer in agriculture to share the pie.

On jobs, Dr. Ahluwalia pointed to a ticklish situation, where, to achieve high growth India has to climb the technology curve, otherwise it would be edged out of the fast-automating global supply chain. But climbing higher on technology means creating fewer jobs, such being the nature of technology today, with the advent of artificial intelligence. To solve this problem some structural change is inevitable, which means that some people could lose jobs even as others get better paying jobs. India’s politicians have to get this message across to the people somehow in a manner that it is felt as good.

Four aspects of growth

Dr. Ahluwalia observed that achieving high growth had four aspects – inherent strength of the Indian economy, global economic situation, macro-economic stability and reforms. The inherent strength of the Indian economy, in terms of features such as entrepreneurship, skills, savings, infrastructure and quality of institutions, he said, was not in doubt. If well managed, the economy can deliver growth of more than 8 per cent.

Global economic situation, the economist said, was not encouraging, with the US and China slowing down and Europe “in a mess”. Furthermore, unlike in the past, every country has begun to look at exports to power their growth, so India would face competition in the shrinking world market. Added to this is the volatility in oil prices, making things look very difficult. The current account deficit, while not yet alarming, would need to be carefully managed, he said.

Dr Ahluwalia on ‘macro-economic stability’ said that it was in this context that he made the suggestion to set up an independent fiscal stability council. He said that he did not have a high opinion on the revision of GDP figures of the past years. But even while ignoring the merits or demerits of the revision, the lowering of the figures would only send across a message that India never grew at over 8 per cent, and would set a lower benchmark for confidence to achieve higher growth.

Dr Ahluwalia stressed on the need to keep fiscal deficit under check. Fiscal deficit (the excess of government’s expenditure over own income), which is funded by either government borrowing from the market or printing new currency, means a lot to the economy because a high deficit means higher government borrowing and consequently a smaller pool for the private sector to borrow. Because government brings in a big demand for funds, it thus raises the cost of borrowing for others.

Further, he observed, a major source of funds for investments is the savings of households. This sector’s saving in India works out to about 7 per cent of GDP, which is exactly the same percentage of GDP as the deficits of the central and state governments put together. This implies that household savings are being absorbed by the governments. This would not be bad if the governments used this for investments, but currently the savings are being used to run the governments. Even this would not be bad if it were a one-year situation, but judging by the commitments made by the governments in an election year, clearly household savings would not go to boost investments, Dr. Ahluwalia said.

High fiscal deficit also meant a higher ratio of deficit to GDP, a parameter that foreign investors look to while deciding where to put their money. Dr. Ahluwalia noted that the high deficit to GDP ratio is also reflected in the higher cost of government’s long term borrowing, which is about 7.6 per cent, ironically, in a situation when the inflation is only 2.5 per cent.

Whichever government comes to power after May would need to find an answer to the question of how to keep fiscal deficit under check, while at the same time, spending more on infrastructure, education, research and Defence, Dr Ahluwalia said.

“The fiscal correction that we need in next five years has to be sufficient to accommodate the additional expenditure while at the same time keeping the fiscal deficit low. That is really a huge challenge. I hope whatever government comes into place, creates a credible sense that they know this is the challenge and this is how they are going to meet it,” he said.

Speaking on the same platform, Dr. C Rangarajan, renowned economist and former Governor of RBI, stressed on the need to find jobs outside agriculture too. He said that if a farmer wanted to earn the same income as the lowest bank employee, he would have to have 15 acres of land.