Economists urge gradual consolidation, see fiscal deficit near 6% in FY23

Global observers of the Indian economy felt a quick consolidation in India’s fiscal policy may not be the right way to go ahead, and that only a gradual path must be embarked on to ensure growth inches above expectations.

While they agreed on buoyant revenue and pace of recovery cranking up growth, they held that reviving lost jobs could be complicated, and will require concerted efforts in areas that need support, particularly the construction sector.

They were on a panel that discussed the future of India’s fiscal and monetary policy and its implications on growth, at a conference organised by the Confederation of Indian Industry, an industry lobby group.

Sudipto Mundle, distinguished Fellow at the National Council of Applied Economic Research, Taimur Baig, managing director (MD) and chief economist at DBS Bank, Sajjid Z Chinoy, chief India economist at JP Morgan, and Neelkanth Mishra, MD and co-head of Asia-Pacific strategy and India strategist at Credit Suisse, were on the distinguished panel.

Both Chinoy and Mishra are on the Prime Minister’s Economic Advisory Council as part-time members.

Shankar Acharya, former chief economic advisor and a member of the 12th Finance Commission moderated the dialogue.

The economists expect a fiscal deficit close to 6 per cent in 2022-23. All of them mentioned the plight of the informal sector and the need to reverse the losses therein to secularly revive jobs and consumption in the economy.

“There has been scarring in the informal sector. As a result, consumption levels have stagnated. The marginal propensity to consume — how many individuals spend for every additional rupee earned — has been affected,” said Sudipto Mundle.

The supply chain disruptions have a lot to do with the underperforming informal sector, he added.

Baig said that expedited formalisation has had a collateral damage on small businesses, not equipped to handle it.

This resulted in major scarring. Fiscal policy should cater to these areas in the economy, he said.

“In the long run, formalisation will improve the business environment. But done hastily, it erodes the tax base and hurts the fisc, rather than helping it,” said Baig.

On monetary policy, they asserted that the movement should now be to push real interest rates into positive terrain.

“The Reserve Bank of India should look at narrowing the policy corridor at a gradual pace, such that real interest rates cease to be negative,” said Chinoy.

Mundle said that much of the heavy lifting has been done by the central bank in the period of deep distress. Now that core inflation is at the upper end of the band, and the US has started tapering its bond purchases, India’s monetary policy should think about raising interest rates.

“The heavy lifting, now, remains to be done at the fiscal level. To that effect, the buoyant revenues this year have been a relief,” added Mundle.

Mishra remained the most optimistic, and suggested that actual growth numbers in successive years could be in the 9-10 per cent range, against the consensus near-7 per cent mark.

But he also said that parts of the economy are still struggling, and they need to be recognised. A lot of job losses yet to be recovered are in the services sector.

Even if these jobs return, their household balance sheets are broken, and they will take time to mend. Repairing them at the earliest should be a priority of the fiscal policy, said Mishra.

The ray of hope could be the nascent, but meaningfully reviving construction sector. After a brief eight-year period of flat nominal output growth in the sector, indications are such that they have now started to turn, he said.

Talking about fiscal consolidation, Chinoy said there is a need to reduce primary deficit and reduce debt pressure. But the process should not be too quick, he cautioned. Such rapid tightening of fiscal policy has in the past choked the growth potential of advanced economies.

Mundle mentioned that while sustained expenditure will solve the problem of growth, it may not rescue us from the job problem. For that, growth rates need to be higher than 7 per cent, he added.