Supporting Finance Minister Arun Jaitley’s stance to continue with the fiscal consolidation roadmap, Vitor Gaspar, Director, Fiscal Affairs Department at the International Monetary Fund, said there is no contradiction between such a move and a growth-friendly fiscal policy.
“India and most other countries around the world will have to upgrade their fiscal framework to manage fiscal risks in the medium term,” he said.
In an interview with
For a country like India, fiscal policy should be seen in the context of the strategy for growth and development. In about 10 years, India will have the largest population in the world. India is a very dynamic economy and is one of the bright spots in the world. It is the largest economy, which is growing at the fastest pace in the world. Having a fiscal policy that is credible and brings confidence is very important. The IMF thinks that following a strategy of medium-term fiscal consolidation is good and India is pursuing it successfully. It should be continued. We don’t see any contradiction between such a policy of fiscal consolidation and a fiscal policy which is growth friendly.
Should the fiscal deficit target be a fixed number or a range?
We think it is very important that the Indian Budget decided to follow the fiscal consolidation strategy. Going forward, India and most other countries around the world will have to upgrade their fiscal framework to manage fiscal risks in a way that fiscal policies are robust and resilient. But, robustness and resilience in India is not enough given the priority of growth and development. A fiscal framework that allows policies to be pursued in a medium to long term is very important. And there, public investment is very topical right now.
RBI Governor Raghuram Rajan said monetary policy may not be the right way to get out of current slowdown. Do you think the era of fiscal and monetary easing policies seen after 2007-08 is over?
The situation now is very different from that at the beginning of the global financial crisis. Monetary policy should focus on delivering the inflation target and it can do so to a very large extent. In many advanced economies, interest rates are at or near zero. In those circumstances, the conduct of monetary policy becomes more complex. Some non-traditional instruments like monetary easing are used and in some cases, central banks have pushed interest rates into negative territory, which is unusual. In this trying circumstance, the importance of comprehensive and coordinated policies is very high. At the same time, the communiqué from G-20 said there has to be a global perspective. So coordination of policies in the world is also important but, there is no ‘one size that fits all’.
The issue of banks’ balance sheet and stressed corporate assets was taken up by the IMF in its Article IV Consultation of India. How big a threat is this?
It is important to track the progress that is being made. The central bank has been taking action, the government has been supportive. We believe that the process must continue and the problem will have to be solved.
How does the IMF view the situation?
The IMF has a global perspective. There is indeed a case to take this global view as spillovers and spillback have never been stronger and the degree of integration is very high. The premium on the ability of authorities around the world to come to a common view which allows consistent policy actions which preserve the fundamental characteristics of the global system is very high.
How do you deal with the global slowdown, especially as the crisis in a lot of debt-struck EU nations has been going on for very long?
Monetary policy should remain such as to deliver the inflation target. But at this point in time, the complexity of the situation is such that coordination with fiscal and structural policies makes sense. In the Euro area, an additional element is to restore the power of the transmission mechanism of the monetary policy and from that view point of the burden of the non-performing loans on banks’ balance sheet is also important.