Govt has no excuses on fiscal deficit this year, says Rathin Roy

The government has done well in hiking import tariffs on certain discretionary items, Rathin Roy, member of Prime Minister Narendra Modi's Economic Advisory Council, and director of National Institute of Public Finance and Policy, said in a conversation with Arup Roychoudhury. Excerpts:

You were a member of a panel tasked with advising a new fiscal roadmap. What do you think of the Modi government's record has been so far in terms of central finances? 

The government's record in terms of sticking to a fiscal deficit target, barring last year, has been exemplary. And even for last year, I have considerable sympathy for the government, because when I went to pre-Budget meetings, other than me, every other private-sector economist advised the government to not meet its fiscal deficit target. The private sector in the country, pushes the government, in the name of aggregate demand, to not meet its commitments and it becomes all that more difficult for the government to not meet its fiscal targets. 

So while I feel the fiscal commitment by the government could have been secured last year, I think a combination of forces made it difficult for it. When it comes to this year's fiscal deficit target, I have to say this emphatically, nothing in the present situation warrants any fiscal slippage. I repeat, I do not see any reason for the government to not meet its fiscal deficit target this year. I am extremely pleased that the finance minister has clarified this a number of times. 

The private sector should not again come into pre-Budget meetings and argue that deficiencies in the aggregate demand and their own internal difficulties should be paid for by the macro-economy, by putting pressure on the fiscal deficit target. 

According to you, what are the biggest reasons behind the rupee depreciation, and does the government have an answer to that?

If you are looking at it from an India-specific context, we have to understand that our balance of current account is in structural deficit. Last year, the International Monetary Fund predicted that CAD would rise to 2.6 per cent of gross domestic product (GDP) for this year. So if I take that as a benchmark on my own calculations, then I would say that that would be consistent with a depreciation of the rupee by 4-6 per cent. When the rupee depreciates beyond that range, we have to ask what factors are behind it. It was not a 12 per cent depreciation which was anticipated, it was half of that. 

That additional depreciation happened for two reasons. One, a consequence of the experience of the US economy in the emerging levels of growth, and second, speculation in the markets regarding future events due to the current tariff wars between the US and China. The algorithms used by financial players to allocate money to the emerging markets were altered and that meant that the total pot available to the emerging markets reduced. That reduction was compounded by difficulties in Argentina and Turkey. So as a consequence, it became more difficult to attract finance capital, whether foreign portfolio investment or foreign direct investment, to finance the current account.

As a response, the government announced a number of measures, including raising tariffs on what it considers to be non-essential items? Isn’t such a move protectionist in nature?

I am always sure that the government could do more to communicate better. I think it is unfortunate that we are using terms like ‘curbs’ and ‘essential’ and ‘non-essential’. Apart from that, I am very happy with the list of items. What the list has done is take the position of a moderate set of tariffs on a number of items of consumption within the WTO parameters, and confirming with international obligations. In my view, this is not an attempt to deal with the CAD problem, nor is it an attempt to raise revenue. 

These are not the first order objectives. In my view, it signals the willingness of the government to acknowledge that we have structural problems in the nature of the composition of the import demand, and that a lot of the incremental import demand is coming from the consumption demand of the top 100 million of this population. And that demand is inelastic. 

Are the hikes in import tariffs also India's way of buffering against the trade wars? 

It signals that India is respectful of multilateral agreements and free trade agreements. Certain items that people wanted to be put on, the government has not included in the list, because we have commitments. However, it also signals that we are ready to respond should the more powerful economies decide not to play by the rules. 

Do you think that record petrol and diesel prices, and other factors like minimum support price for foodgrains, will lead to a spike in inflation?

It is quite logical that overtime, any rise in oil prices that is not responded to by reduction in aggregate demand, will lead to an increase in inflation. That will be a factor that will translate into what will happen to the consumer price index. And if the impact of that, in conjunction with other factors which you mention, then we have a system to deal with that which is the Monetary Policy Committee. What would be wrong is for anybody to anticipate the actions of the MPC in advance.