PM Modi's economic panel bats for fiscal consolidation

Rejects IMF's predictions, to provide solutions to perk up growth

The newly constituted Economic Advisory Council to the Prime Minister (EAC-PM) on Wednesday batted for sticking to fiscal consolidation at a time when there was demand for fiscal stimulus to boost sagging economic growth. After its first meeting, the Council arrived at a broad consensus about the slowdown but also said there were green shoots, which would be visible in the months to come.

It has identified major areas for accelerating growth and employment over the next six months, “with greater last mile connectivity”.

The Council disagreed with the International Monetary Fund (IMF), which drastically cut India’s growth projections from 7.2 per cent to 6.7 per cent for FY18 after growth fell to a three-year low of 5.7 per cent in Q1 FY18.

“There is a consensus (on fiscal deficit targets), but you will not get the answer what the consensus is beyond the statement that fiscal consolidation exercise should not be  deviated from,” Bibek Debroy, chairman, EAC-PM, said after the meeting.

The Centre’s fiscal deficit has already touched 96 per cent of the Budget Estimates in the first five months of FY18, against 76 per cent in the same period of FY17. This was despite the fact that the government heavily cut capital expenditure for August, neutralising front-loading of outlays for the initial months.

If the government does not deviate from its target of reining in its fiscal deficit at 3.2 per cent of the gross domestic product (GDP), providing stimulus would be almost impossible. If one adds the states’ financial position, the problem of fiscal deficit becomes even more problematic.

Reserve Bank of India (RBI) Governor Urjit Patel had also said there was hardly any space left for fiscal stimulus. The general fiscal deficit, or the combined deficit of the Centre and states, is in the region of 6 per cent of GDP, which is a loose fiscal stance.

“In other words, we should be very cautious, lest fiscal actions undercut macroeconomic stability,” Patel had said.

There are, however, different views on a stimulus package.

For instance, NITI Aayog Vice-Chairman Rajiv Kumar is of the view that it is revenue deficit which is more important than fiscal deficit. “The government must have instruments to counter cyclical situations,” he had said.

Whether stimulus or not, EAC-PM on Wednesday said it would give suggestions to revive economic growth and create job opportunities to the prime minister.

The Council will have another formal meeting in November.

“Today, it was the first formal meeting. We will also have smaller meetings with stakeholders...We will also have another formal meeting next month and give recommendations to the prime minister,” Debroy said.

Chief Economic Advisor Arvind Subramanian made a presentation on accelerating economic growth, including investments and exports, using a combination of different policy levers.

The Council will structure its report around 10 themes in the coming months. The report will be prepared after consulting ministries, states, experts, institutions, the private sector, and other key stakeholders. It will also come out with Economy Track Monitor, using lead indicators and triggers for action.

EAC-PM Chairman Debroy said improvement in growth had already started and would be visible in the coming months. While PMI manufacturing, services and core sector data did point at some sort of green shoots, the index of industrial production data — to be released on Thursday — will give more credence to this theory.

On IMF lowering India’s growth projections, EAC-PM member Rathin Roy said his experience from the past was on 80 per cent of the occasions, IMF projections were incorrect. “Nowadays, these are incorrect even up to 90 per cent times,” he said.

Asked whether there would any duplication in roles so far as monetary policy is concerned, given that there was the RBI as well as the Monetary Policy Committee, Debroy said, “Whenever we do something on monetary policy, it will be in consultation with the RBI. We will also take on board the views of the MPC. It will not be necessary be a conflicting view, but it will be another view, which will complement and supplement what the RBI is doing."

He said monetary policy was one of the policy instruments available. “We will be looking (at monetary policy) more from structural point of view and not so much whether the rate should be raised x or y per cent,” Debroy said.

Asked whether it will give recommendations to the finance ministry on Budget, Debroy said, “We will give recommendations to the prime minister. When we do that on the Budget we will consult the relevant ministry. It is not our job to push those recommendations, or to give those recommendations to the finance ministry.”

On the growing unemployment in the country, Debroy said any tangible and substantial argument on this can be made only if there is adequate data on employment and unemployment.

He also said he would continue as a member of the NITI Aayog. Besides him, the member-secretary of the EAC-PM, Ratan Watal, is also a member of the NITI Aayog.

Ashima Goyal, another member of the Council, said that the body would bring technical and professional input to policy making. She said that the Council will have several informal and formal meetings with all stakeholders before coming up with firm recommendations.

Asked whether the Council should  not have been constituted three years back, member Surjit Bhalla said the first theme identified by the council is acceleration of economic growth which was already high three years ago.