Govt should find fiscal space to ramp up investments, says NITI Aayog V-C

Banks under prompt corrective action (PCA) should be allowed to part-lend again, says Rajiv Kumar

As the gross fixed capital formation is the silver-line in otherwise subdued GDP data for the second quarter of FY’19, NITI Aayog Vice-Chairman Rajiv Kumar tells Indivjal Dhasmana that the investment cycle now needs to be pushed up further by fiscal and monetary policies. Edited excerpts:

Economic growth has slowed down by 1.1 percentage point in Q2 as compared to Q1. Is it a matter of concern?

It is bit of a disappointment quarter-on-quarter (QoQ), but still an improvement year-on-year (7.1 per cent versus 6.3 per cent). But the disappointment even on a QoQ basis should moderate, given Q1 was an exceptional quarter on account of a very low base (GDP growth was 5.6 per cent in Q1FY18). However, the real silver lining is in the gross fixed capital formation.

What drove the growth in investment?

This is the beginning of the capex cycle. It was reflected in the hike in import of capital goods, and in the hike in credit from commercial banks. Had IL&FS not happened, the capex would have been even higher. That is why I have been pushing for and advocating that the RBI should take care of any negative effect of IL&FS. The capex cycle needs to be sustained, which is the major policy intervention to be made now. 

What should be done to perk up investments?

Banks under prompt corrective action (PCA) should be allowed to part-lend again.  That is what we have been arguing for from NITI Aayog, and now the Department of Financial Services is also pushing for. It should also be ensured that non-banking financial companies, which have been shrinking their balance sheets, don’t do that any longer. They should expand their credit. Then, the government should find a fiscal space to ramp up public investments, to support a turnaround in the capex cycle. 

The government has already breached the fiscal deficit target given in the Budget Estimates. In this scenario, do you think it will find a fiscal space?

You have to see the full cycle and not the one month data. Our disinvestment target should be achieved; not much has been done on that.

Are you for breaching the fiscal deficit target?

I am all for it, especially in a situation where the central bank is extraordinarily hawkish in its monetary policy. We need to compensate for it through the fiscal policy to maintain the growth impetus. However, I emphasise that we can breach the fiscal deficit target, provided we have made all efforts we need to create a fiscal space wherever possible, particularly disinvestment. 

You talked about hawkishness of the RBI. What do you expect it to do now?

The signals are very clear — inflation is below the RBI’s target; economic growth rate is also below the RBI’s own target. As such, the monetary policy should get into an expansionary mode, not just by a change in the rate but also by taking steps, in line with what I said above about commercial banks. Besides, a window needs to be created for NBFCs so they don't shrink their balance sheets any longer. The RBI must ensure greater credit availability to finance the incipient capex recovery. 

As the growth numbers in Q2 look realistic. What will you tell those who criticised back series data?

Those who were skeptical of CSO's competence, must now recant publically.