MPC member Ashima Goyal says no time for aggressive fiscal consolidation

The government should not go in for an 'aggressive fiscal consolidation' in the upcoming budget as global risks have not abated, RBI Monetary Policy Committee (MPC) Member Ashima Goyal said on Wednesday.

Goyal further said subsidies are expected to come down as food and energy inflation moderates. WPI inflation in food articles in November was 1.07 per cent against 8.33 per cent in the previous month. In the 'fuel and power' basket, inflation was 17.35 per cent last month.

"Given fears of a global slowdown, this is not the time for aggressive consolidation. Sticking to small pre-announced steps on the path will minimise growth sacrifice, while moderating demand and the current account deficit, thus lowering the risk premium that keeps spreads high and raises the cost of government and private borrowing," she told PTI.

India's fiscal deficit, the gap between expenditure and revenue, is projected to come down to 6.4 per cent in current fiscal ending March 2023, from 6.71 per cent in 2021-22.

The government has set a consolidation target under which it aims to reach a fiscal deficit level below 4.5 per cent by FY26. Fiscal consolidation refers to ways and means of narrowing the fiscal deficit.

Goyal was asked whether the finance minister should go for fiscal consolidation or fiscal expansion in her upcoming budget.

Finance Minister Nirmala Sitharaman will present the Union 2023-24 Budget in Parliament on February 1.

The eminent economist said expenditure must be counter-cyclical and the mistake made in the 2000s, when expenditure rose with tax revenues, should be avoided.

"Well-integrated components of the current macroeconomic policy strategy have delivered and should continue given global risks have not abated," she opined.

According to Goyal, the strategy includes prioritising investment while giving essential support for the vulnerable.

"Better composition of government expenditure and other supply-side action has enabled excellent monetary-fiscal coordination that has strengthened Indian macros," she said.

While noting that debt ratios came down sharply last year under higher growth, she said institutions and incentives have to be strengthened to help sustainably implement the strategy including in states.

According to International Monetary Fund (IMF), more than a third of the global economy will contract in 2023, while the three largest economies -- the United States, the European Union, and China -- will continue to stall.

Earlier this month, the RBI revised down its GDP growth estimate for FY23 to 6.8 per cent from the earlier 7 per cent, while the World Bank revised it upwards to 6.9 per cent, saying the economy was showing higher resilience to global shocks.

To a question on taxing agricultural income, she said," I am in favour of moving to a fair and compliance-friendly regime of low taxes on a larger base, which requires exemptions to be reduced, along with more intensive data-mining to curtail use of exemptions to evade taxes."

Responding to a question on some Opposition-ruled states' decision to switch to the Old Pension Scheme (OPS), Goyal said returning to the old pension scheme implies passing on liabilities to future governments.

"We need more transparency in budgets, with current and future financing requirements of any new scheme clearly shown and sources of finance indicated," she emphasised.

Noting that governments have to pay high interest on debt which eats up a large share of revenue, Goyal suggested that governments should only borrow for productive expenditure that raises enough tax and other revenue so that it can be repaid.

The OPS, under which the entire pension amount was given by the government, was discontinued by the NDA government in 2003 from April 1, 2004.

Under New Pension Scheme, employees contribute 10 per cent of their basic salary towards pension while the state government contributes 14 per cent.

Two Congress-ruled states, Rajasthan and Chhattisgarh, have already decided to implement OPS. Jharkhand too has decided to revert to OPS, while Aam Aadmi Party-ruled Punjab recently approved the reimplementation of OPS.

Asked why the RBI failed to contain inflation for 10 consecutive months, Goyal pointed out that these 10 months have coincided with the Ukraine war that raised international energy and food prices to which India is particularly sensitive and this followed the pandemic, which had also raised global commodity prices as supply-chains snarled.

"A flexible inflation target policy has to look through temporary supply-shocks but as soon as it became clear that supply-side inflation was going to persistently exceed the tolerance band, repo rates were raised within 6 months to make ex-ante real interest rates positive," she said.

According to Goyal, supply-side action also contributed and inflation is already within the tolerance band, without hurting the nascent growth recovery.

"India has handled the shocks better than most major economies," she asserted.

The central bank has been tasked by the government to ensure that retail inflation remains within the range of 2-6 per cent.

The inflation print for November has come under 6 per cent, within the tolerance band for the first time after 10 months.