The biggest problem facing the economy in recent times is the rising current account deficit, said Raghuram Rajan, Chief Economic Adviser to the Government, echoing what both the Finance Minister and the RBI Governor have been saying time and again.
“As you finance the CAD from outside, you are dependent on the interest of foreign investors. We could support it so far because the world economy has been doing rather poorly and foreign investors have been looking at places to invest.
“But can we continue to rely on their forbearance? That’s the big question,” said Rajan, addressing the National Institute of Bank Management convocation ceremony.
Many challenges
Slowing investments, rising fiscal and current account deficits, rising food inflation, slowing growth and external problems pose significant challenges to the Indian economy, he added.
Explaining the rationale of the Union Budget, Rajan said: “The objectives of the Budget are to restore growth and also re-balance spending away from consumption towards investments.”
He added that the central objective of the Budget has been to bring down the fiscal deficit.
And to achieve this, the Government has primarily focused on cutting consumption-driven expenditure.
He ruled out raising taxes significantly or tinkering with the current tax structure so as to afford stability in the way people perceive the tax structure in India. He opined that there is a need to increase spending in a way to encourage investments.
SME growth
“One of the subtle ideas of this Budget was to move away from investments in specific sectors towards offering incentives more broadly. There was also an attempt to try and create incentives for small and medium enterprises (SMEs) to grow,” he said.
One of the problems with SMEs in India is that they continue to remain small. In other countries SMEs grow fast and create jobs, he added.
Rajan also said the Government felt it was important to reduce expenditure by cutting down on “disproportionate” subsidies.
To this end, he said the Government has taken many steps such as increasing diesel prices in phases. This, he said, was done before the Budget.
Re-iterating what Finance Minister P. Chidambaram said earlier, the Chief Economic Adviser said, “The Budget is just one step in tackling the many problems facing the economy.
“Most of the action is happening, and will happen, outside the Budget. Boring budgets may become the future dream Budgets.”