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More Space On Monetary Side Than Fiscal For Boosting Growth: Sanyal

Economic growth hit over six-year low of 5 per cent for the first quarter ended June 2019 mainly driven by demand slowdown.

Photo Credit : Ritesh Sharma


Ahead of policy review by the Reserve Bank of India (RBI), Principal Economic Adviser Sanjeev Sanyal on Tuesday said there is far more space on the monetary side than the fiscal front for lifting sagging economic growth.

Economic growth hit over six-year low of 5 per cent for the first quarter ended June 2019 mainly driven by demand slowdown.

To push consumption, the RBI slashed benchmark interest rate four times consecutively since January 2019. The central bank reduced the repo rate (short-term lending rate) by 1.10 percentage points during the year.

The next monetary policy review is scheduled to be held between October 1 and October 4. It is expected to further cut interest rate to reinvigorate consumption.

"So, the current economic situation is unique in India. All these years, we saw a slowdown in India because of supply-side constraints. This time, we are witnessing a genuine demand-driven slowdown...on the demand side, the two levers are either fiscal or monetary.

"Now, the point being made repeatedly is that there is clearly far more space on the monetary side than fiscal side as long as you want to maintain yourself within FRBM (Fiscal Responsibility and Budget Management) trajectory. Space is greater on monetary side," he said at an event here.

He also said high cost of borrowing for the economy with low inflation is also not tenable.

"The government borrows at 6.5 per cent but there are large parts of the economy that are borrowing at 11.5 per cent and 12.5 per cent. So, in a country where you have 3 per cent inflation, 900 basis points real interest rates are clearly not tenable," he said.

Sanyal further said the government has taken several measures to boost and the finance minister may speak again in a few days to clarify on the some of the announcements made.

"There is a whole bunch of things that the finance minister just announced. There will be more. Of course, there is a Budget in few months from now where bigger and more clear vision for next few years will be unveiled," he said.

On the goods and services tax (GST), Sanyal said ideally it should be simple.

"I am personally a little uncomfortable with making deviation. It unfortunately adds more to the noise...If you did want to cut GST for something for a larger reason, you should be doing it. If you are doing it in response to slowdown, it is not a good idea," he said.

With regard to a USD 5-trillion economy target, he said it does signal that Prime Minister Narendra Modi wants sustained growth in this term.