Economists call for gradual consolidation, forecast budget deficit close to 6% in fiscal 23
Global observers of the Indian economy have argued that a rapid consolidation of India’s fiscal policy may not be the right way forward and only a gradual path should be taken to ensure much higher growth. current expectations.
But while they agreed that sustained incomes and the pace of recovery would ensure growth, they felt that reactivating the jobs lost in the growth process would be tricky and would require concentrated efforts in areas needing support, such as the construction sector.
They were part of a panel that discussed the future of India’s fiscal and monetary policy and its implications for growth, at a conference hosted by the Confederation of Indian Industry (CII), an industry lobby group. Sudipto Mundle, Distinguished Member of the National Council for Applied Economic Research, Taimur Baig, MD and Chief Economist at DBS Bank, Sajjid Chinoy, Chief Economist for India at JP Morgan, and Neelkanth Mishra, MD & Co-Head of Asia-Pacific strategy and Indian strategist at Credit Suisse, were among them. Chinoy and Mishra both serve on the Prime Minister’s Economic Advisory Council as part-time members.
Shankar Acharya, former chief economic adviser to the central government and member of the 12th Finance Committee moderated the discussion.
They all spoke of the critical situation of the informal sector and the need to compensate for its losses in order to revive secular employment and consumption in the economy.
“There have been scars in the informal sector, and as a result, consumption levels in the economy have stagnated. The marginal propensity to consume – how much more people will spend for each additional rupee earned – has been affected, ”Sudipto Mundle said.
Supply chain disruptions have a lot to do with the underperforming informal sector, he said.
Taimur Baig said the accelerated formalization had collateral damage on small businesses, which were not equipped to handle it. This resulted in significant scarring. Fiscal policy must take these areas of the economy into account.
“In the long run, formalization would improve the business environment, but done in haste erodes the tax base and harms the tax authorities, instead of helping them,” Baig said.
On monetary policy, they asserted that the move should now be in order to push real interest rates into positive territory.
“The RBI should seek to narrow the political corridor at a gradual pace so that real interest rates stop being negative,” Sajjid Chinoy said.
Mundle said much of the bulk of the work was done by the central bank during the period of deep crisis. Now that core inflation is at the high end of the range and the United States has started to cut its bond purchases, Indian monetary policy should consider raising interest rates.
“The bulk of the work now remains to be done at the fiscal level. In that regard, the dynamic revenues this year have been a relief, ”added Mundle.
Neelkanth Mishra remained the most optimistic of the group and suggested that actual growth figures for growth in successive years could be in the range of 9-10 percent, against a consensus close to 7 percent.
But he also said parts of the economy are still struggling and need to be looked at. Many of the job losses still to be recovered are in the service sector.
Even if these jobs return, their household balance sheets are shattered and they will take time to recover. Fixing this sooner should be the priority of fiscal policy, Mishra said.
The ray of hope could be the nascent construction sector, but in full revival. After a brief eight-year period of flat nominal output growth in the sector, indications are such that it has now started to turn, he said.
Speaking of fiscal consolidation, Chinoy said it is necessary to reduce the primary deficit as soon as possible, in order to reduce the pressure on the debt. But the process shouldn’t be too quick, he added. Such a rapid tightening of fiscal policy has in the past stifled the growth potential of advanced economies.
Mundle critically mentioned that while sustained spending will solve the growth problem, it may not save us from the jobs problem. For that, he said, we need growth rates above the 7% optimists think.