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This Is Not The Time To Hold On To Fiscal Framework: Rajiv Kumar, Vice Chairman, Niti Aayog
“So a consumption-led fiscal stimulus will not result in a virtuous economic cycle unless its magnitude is huge as has been the case in the US or other advanced economies”
Photo Credit : Himanshu Kumar
The pandemic required bold measures and a greater flow of capital into the system which however remains below 1 per cent of India’s GDP — it’s quite less in comparison with other developing countries. In such a scenario it’s important to hold on to the recovery indicators. Rajiv Kumar, Vice Chairman, Niti Aayog opens up with BW Businessworld’s Manish Kumar Jha on issues such as the complexity of the economic recovery and what will drive growth; the ever burning debate on the consumption-led fiscal stimulus which he says will not result in a virtuous economic cycle unless its magnitude is huge.
As we look at the some of the emerging data, the second wave of Covid-19 is leading to lower expected growth. A lot of the growth projections built into the Union Budget are mired in uncertainty. How do you look at the economy now? Moody’s projection cuts GDP forecast to 9.3 per cent from 13.7 per cent. What is your take?
There is hardly any doubt that the pace and nature of the expected post-lockdown recovery has been affected by the second wave. It has directly impacted economic activity in the first quarter of FY22 and will create much avoidable uncertainty going forward. However, the PMI for both manufacturing and services remains in positive space (above 50) and exports during January to April have been at a record high.
Global economy is showing all signs of strong synchronised recovery and our exporters can and will make the best use of this opportunity, which may well be with us for the next 24 months.
So driven by exports and post-lockdown likely jump in consumption demand, our recovery, when it takes hold in the second quarter of this fiscal year, will most likely surprise observers with its strength and sustainability
I will not be surprised at all if those agencies that have revised growth estimates downwards will be revising them upwards by the time we come in to our festival season. Of course, all this depends upon the course of the pandemic and the success in our vaccination drive for which the government has pulled out all stops.
Many argue that a fiscal deficit target is irrelevant under the current circumstances and that the government should instead focus on a large enough stimulus package. Are we still talking about 1 per cent of GDP? What is your take?
I also think this is not the time or the circumstance to hold on to some rigid fiscal framework. Monetary policy has done the heavy lifting and its space is somewhat limited at this point. So the fiscal policy will have to play its due counter cyclical role.
The fiscal balance can be achieved once the pandemicinduced crisis is behind us. But also we have to encourage far more robust quasi-government financial mobilisation by sub-sovereign entities and private agencies so that it does not increase the government debt to GDP ratio.
And we must note that our government debt to GDP ratio remains lower that most other G-20 member countries. And our total debt to GDP ratio is far lower that either the advanced economies or even some of the larger emerging economies.
The Budget has allocated Rs 35,000 crore for vaccination. It now needs to be increased due to the severe second wave. Will the Centre intervene or leave it to the States to fend for themselves?
Given that accelerating the pace of vaccination and covering as large a percentage of population specially working age population as fast as possible is the principle key to achieving a sustained economic recovery, the government will have to focus on that goal and allocate the necessary fiscal resources for it. This is imperative.
Are there any short-term and long-term measures to address job losses due to the pandemic?
It is surely a fact that people have lost jobs as economic activity has suffered both in the first and now the second wave. The government has already taken several measures to ameliorate the worst impact of job losses by first, hugely ramping up the allocation for MNREGA which surely provides a safety net to returning migrants.
Second, the availability of free food rations for up to 800 million people does ensure sustenance and mitigation that allows workers to wait out the period until the next employment opportunity opens up. Further, the government has ramped up its capital expenditure and outlays on real estate and infrastructure projects which have an employment elasticity of more than 5x of the average employment elasticity in the economy. These expenditures will generate multiplier effects and create employment opportunities in the months to come.
The government has targeted Rs 1, 75,000 crore from privatisation and disinvestment this year. Do you think the privatisation of BPCL, Air India will happen this year? Will you recommend the revival of the Disinvestment Commission?
I am rather confident the budget announcements with regards to disinvestment and privatisation will be achieved.
Why can’t we privatise our ordnance factories? Why should we be wasting the taxpayers’ money on these redundant entities?
There is hardly any evidence to show that public sector defence production units are a huge drag on the defence economy. These units provide the much-needed assurance that the country will not be found wanting in producing and mobilising the necessary strategic equipment when the need arises.
This is largely on account of these units. And in any case there is significant focus on improving efficiency and productivity levels in these entities. In any case, the recent government decisions that even within the four strategic sectors, the presence of public sector enterprises may be limited to four units. I presume this would apply to defence production sectors including ordnance production.
Our growth model is based on domestic consumption unlike the export orientation of major economies in Asia. Also, we are not competitive in global supply chain. Where will sustained economic growth come from?
As I said earlier, we are expecting our exports to reach a record high level this year and to play a major role in sustaining a post-lockdown economic recovery. The government is in regular contact with the exporting community for identifying constraints and addressing them so that our exports find a new momentum.
The RoDTEP (Remission of Duties and Taxes on Export Products) scheme for ensuring that exports do not include any embedded taxes and duties is now fully ready and will be announced very shortly.
Moreover, a special department of logistics in the Ministry of Commerce is preparing ambitious plans to address logistics deficits and facilitate exports.
"I am of the firm view that we do not need long-winded and verbose policy documents for expanding our exports. Instead, we need, as is being done by the relevant ministries and departments, to identify binding constraints and effectively address them. This will yield stronger and more timely results."
Nobel laureate Abhijit Banerjee has said that targeting the poorest will be an expensive exercise. Instead, he favours transferring funds to the bottom 60 per cent of the population, saying spending by them will create a stimulus effect. What are your thoughts on this?
The government is of course open to all suggestions and considers them very seriously especially those which come from such erudite and celebrated sources. The consumption demand-based stimulus has two issues apart from the one of correctly identifying the beneficiaries and ensuring that the intended transfers to those who may still out of the formal banking system. This might still be true despite the opening of nearly 400 million bank accounts during the last six years under the Jan Dhan scheme.
The first issue is that a sudden stimulus induced jump in consumption demand may result in an inflation spike especially during a time when supply side bottlenecks are plentiful given the large number of regional lockdowns and their negative impact on production capacities and logistics. So we may well wait for supply side normalcy to be restored before applying that stimulus.
There is very clear evidence that consumers are shy of spending additional monies they receive in that the deposits of even the Jan Dhan account holders have been increasing all through the pandemic period. Second, the even if the consumption demand did perk up, it will simply result in a marginal improvement in capacity utilisation in the manufacturing sectors which is at a low of 67 per cent currently. The stimulus can hardly be sufficiently large to push up capacity utilisation to near 80 per cent when investment is triggered for capacity expansion.
So a consumption-led fiscal stimulus will not result in a virtuous economic cycle unless its magnitude is huge as has been the case in the US or other advanced economies.
I wonder if we have the similar kind of fiscal space even if we give the FRBM targets the go by and not be rigid. I don’t see these proposals come with any reasonable arithmetic to show their feasibility in triggering a virtuous cycle.