Economists urge gradual consolidation, see fiscal deficit close to 6%

Economists urge gradual consolidation, see fiscal deficit close to 6%

Global observers of the Indian economy felt that a quick consolidation in India’s fiscal policy may not be the right way forward, and should only take a gradual path to ensure growth above expectations.

While they agreed on buoyant revenues and the pace of recovery driving growth, they recognized that reviving lost jobs could be complicated, and would require concerted efforts in areas that need support, particularly construction area.


He was on a panel that discussed the future of India’s fiscal and monetary policy and its implications for growth, at a conference organized 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 of DBS Bank, Sajid Z Chinoy, Chief Economist of India at JP Morgan, and Neelkanth Mishra, MD and Co-Head Asia -Pacific Strategy and India Strategist at Credit Suisse, were on the eminent panel.

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

Shankar Acharya, former Chief Economic Adviser and member of the 12th Finance Commission, conducted the dialogue.

Economists expect the fiscal deficit to be close to 6 per cent in 2022-23. All of them mentioned the plight of the informal sector and the need to address the losses in the economy to secularly revive jobs and consumption.

“There are marks in the informal sector. As a result, the level of consumption has stabilized. Marginal propensity to consume – how many individuals spend for every additional rupee earned – has been affected,” said Sudipto Mundale.

He said the supply chain disruptions have a lot to do with the underperforming informal sector.

Baig said the rapid formalization has put a collateral damage on small businesses, which are not equipped to handle it.

It caused big wounds. He said fiscal policy should cater to these sectors of the economy.

“In the long run, formalization will improve the business environment. But done in haste, it erodes the tax base and hurts financial support, instead of helping,” Baig said.

On monetary policy, he stressed that the movement should now take place to push real interest rates into positive territory.

“The Reserve Bank of India should consider gradually reducing the policy corridor so that real interest rates do not turn negative,” Chinoy said.

Mundle said the heavy lifting has been done by the central bank in the deep crisis period. Now that core inflation is at the upper end of the band, and the US has begun to reduce its bond purchases, India’s monetary policy should look at raising interest rates.
“The heavy lifting, now at the financial level, is yet to be done. To this effect, this year has been a great revenue giver,” Mundle said.

Mishra remained the most optimistic, suggesting that the actual growth numbers in consecutive years could be in the range of 9-10 per cent, while the consensus is closer to 7 per cent.

But he also said that some parts of the economy are still struggling, and they need to be recognized. Many job losses in the services sector are yet to be compensated.

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

A ray of hope may be nascent, but can revive the construction sector in a meaningful way. After an eight-year period of flat nominal production growth in the region, signs are now beginning to turn, he said.

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

Mundle said that while sustained spending will solve the problem of development, it cannot save us from the problem of jobs. He said that for this the growth rate should be more than seven per cent.

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