Fiscal Stimulus Has Always Ended In Tears For India, Says JPMorgan’s Jahangir Aziz

The Indian economy has been running on fiscal stimulus for years and has paid the price for it, says JP Morgan’s Jehangir Aziz

A rickshaw puller tows his fare down a street in Kolkata (Photographer: Brent Lewin/Bloomberg)
A rickshaw puller tows his fare down a street in Kolkata (Photographer: Brent Lewin/Bloomberg)

Amidst calls for a stimulus, comes a reminder that the Indian economy has often paid a heavy price for fiscal profligacy. Speaking to BloombergQuint, Jahangir Aziz, head of emerging market economic research at JPMorgan, said that the Indian economy has been running on stimulus for years and the slow withdrawal of some of these measures has led to pain in the form of high inflation and bouts of volatility in the currency.

“We have been through these phases of fiscal stimulus. In India, fiscal stimulus has always ended up in tears,” said Aziz while recalling the episode of 2008-09.

Soon after the global financial crisis, the then United Progressive Alliance (UPA) government had cut excise duty to give the economy an immediate boost. A delay in withdrawing that stimulus in time led to a widening of twin deficits and was seen as a key reason behind the spike in inflation in the Indian economy in subsequent years.

That’s the difficulty with stimulus. Everybody wants to give it. Nobody wants to withdraw it. We started to withdraw the stimulus only when the taper tantrum hit India in 2013 and we had to adjust.
Jahangir Aziz, Head of Emerging Market Economic Research, JPMorgan

Debate around the need for fiscal stimulus emerged after growth in the economy slipped to a three-year low of 5.7 percent in the first quarter of the current fiscal. Growth has been sliding for five consecutive quarters hit by stagnant private investment, weak exports, along with one-off factors like demonetisation and the implementation of GST.

Growth concerns have been compounded due to concerns that central and state finances are not in the best of health. The central government has exhausted over 90 percent of its fiscal deficit target in the first four months alone. For the full year, the government is targeting a fiscal deficit of 3.2 percent of GDP.

Meanwhile, some states have chosen to redirect expenditure towards farm loan waivers and cut capital expenditure as a consequence.

Aziz pointed out that while the central government has managed to contain its fiscal deficit over the last few years, the combined deficit of the center and states has remained at near 7 percent.

If you take away the last couple of quarters, India probably averaged 7-8 percent growth in the last three years. Remember also that oil has averaged around $40-45 per barrel over this period. If with 7-8 percent growth and oil at these levels, if India cannot reduce its overall deficit below 7 percent, it means we have been running this entire growth over the last few years on the back of very large ongoing fiscal stimulus.
Jahangir Aziz, Head of Emerging Market Economic Research, JPMorgan

Aziz added that at a time when the current account deficit has started widening once again, policy makers would do well to focus on the fiscal deficit. “This is not a new phenomenon. This has been going for the last few years. We just didn’t pay attention to it.”

India’s current account deficit, considered to be a mirror image of the fiscal deficit, expanded to a four-year high of 2.4 percent of GDP in the first quarter of the current fiscal as the trade balance widened. India’s trade account has been hit by a double whammy - export growth has slowed while imports saw an spike, particularly in the months after demonetisation.

Data compiled by JPMorgan shows that imports (excluding gold and oil) rose in the months after demonetisation. This, Aziz explained, suggest some disruption in supply chains due to the cash exchange program announced in November 2016.

“What we had also feared was the demonetisation would disrupt the supply chains that run through both the formal and the informal economies. And if those supply chains get disrupted, then the revival in demand would not get fulfilled by domestic production,” said Aziz while adding that the pick up in non-oil, non-gold imports suggests that demand is being fulfilled through imports.

For more on Jahangir Aziz’s view on growth in the Indian economy, listen below:

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