India In ‘Urgent Need Of Fiscal Push’, Says SBI’s Chief Economic Adviser
The government needs to go on a spending spree, without disturbing the borrowing math, to bolster India’s economic growth, according to Soumya Kanti Ghosh, chief economic adviser of State Bank of India.
Given the growth slowdown, India needs the government to use fiscal policy as a “rev-up tool”, Ghosh said in a report on Tuesday. At this stage, a reduction in spending to meet the fiscal deficit target will not be “prudent” given the lack of other growth drivers, he added.
The government has set a fiscal deficit target of 3.2 percent of GDP for the year to Marc 2018. The Fiscal Responsibility and Budget Management Committee allows for a deviation of 0.5 percent in the face of “far-reaching structural reforms in the economy with fiscal implications”. With growth slowdown ahead of the Goods and Services Tax implementation in the April-June quarter, the government should use this escape clause, Ghosh suggested.
We believe the government should consciously expand the spending and fiscal deficit, without disturbing the borrowing maths.SBI Ecowrap
India’s gross domestic product in the April-June quarter slipped to a three-year low, growing at 5.7 percent. SBI believes that the slowdown is not transient in nature, with a sustained decline since the second quarter of 2017, the report said. This, accompanied by a demand slowdown and languishing private investment has left the ball in the government's court, the report said.
A fiscal push, where the government raises its expenditure on the economy to spur growth, runs the risk of pushing up inflation and interest rates, as was the case in 2009. That’s unlikely to happen now, given stable inflation and excess liquidity in the India’s banking sector, the report explained.
The government’s borrowing, however, needs to remain in check to ensure that it doesn’t crowd out private borrowings and curtail private investments any further. While the government has managed to limit borrowings over the last few years, with Rs 3.4 lakh crore budgeted for fiscal 2018, states such as Maharashtra, Punjab, Uttar Pradesh and Karnataka have announced farm loan waivers worth Rs 88,200 crore. This could push total borrowings by states to 5.3 lakh crore, credit rating agency ICRA said in a note in July.
So how can the government increase spending without exceeding its borrowing target? Ghosh has two suggestions.
1. The government can increase the amount of public sector buybacks and switches – a tool it already has been using to move towards its target for the current fiscal year.
2. It can increase its short-term borrowing while reducing long-term borrowing. With the banking system flush with liquidity, the cost of total borrowing and net borrowing will remain in check.
In this backdrop, he is cautious against focussing on further rating upgrades at this stage.
“Honestly, let’s not chase the rating upgrade mirage. Remember India has had a solitary net rating upgrade in the last 25 years!” Ghosh wrote in the report.