GDP decline: Arun Jaitley hints at stimulus but do govt, RBI have room for an accommodative policy?

On a day finance minister Arun Jaitley hinted at a stimulus package to boost the economy, economists have raised doubts over whether the Reserve Bank of India or the government has the wherewithal to relax fiscal deficit target, devise an accomodative policy stance and make the rupee more competitive.

Singaporean financial services major DBS said in a report that key economic growth drivers of consumption, investments and government spending, are expected to be moderate for the rest of this year.

"As growth slows, pressure for policy support is likely to mount. This will include calls to delay fiscal consolidation, along with a push for the Reserve Bank to resume rate cuts amidst clamour for a competitive currency," the report said, adding "unfortunately, the room to provide additional stimulus on all these fronts is limited".

 GDP decline: Arun Jaitley hints at stimulus but do govt, RBI have room for an accommodative policy?


It further noted that "unfortunately, revenues have been slow to catch-up...Hence, government may struggle to meet its full-year fiscal deficit target of 3.2 percent of GDP for 2017-18. Therefore any shortfall in revenues may require a cut in spending in the March 2018 quarter, and lower the headroom for a growth supportive stance."

The government has been worried after the April-June GDP growth slipped to a three-year low of 5.7 percent. A meeting between Jaitley and Prime Minister Narendra Modi to take stock of the economic situation was on Monday postponed presumably to finalise a stimulus package.

Jaitley on Wednesday said the government is considering additional measures to bolster the economy without giving details on the likely steps.

"We see limited scope for fiscal pump-priming measures and an aggressive rate cutting cycle to support growth. Adopting such quick fixes are a threat to near-term macro stability and carry long-term implications," DBS has said.

A strong fiscal and monetary stimulus following the 2008 global credit crisis had initially shored up domestic growth through higher consumption and public investment, but subsequently led to double-digit inflation and wide domestic and external imbalances, the report noted.

Looking for additional stimulus current on the fiscal front, DBS said "the odds are against an increase in the deficit target to accommodate higher spending without a commensurate pick-up in revenues".

Among others, it observed that this year's fiscal math is already stressed as public spending was front-loaded to offset slower private sector participation and cushion the impact of GST roll-out.

It also notes that consolidated deficit is already in excess of 6.5-7 percent of GDP, and with states' books in a worrisome state, a simultaneous deterioration in Centre's finances "could prove to be a double whammy for macro stability, financial markets and rating prospects".

On possibility of rate cuts, DBS said RBI had last cut rates by 25 bps in August when inflation slipped below the targeted 2-6 per cent range. But headline and core inflation numbers rose to 3.4 percent and 4.6 percent, respectively, and is expected to strengthen to 3.8-4.5 per cent in second half.

"As inflation nears and/or breaches the 4 per cent target, the policy committee should refrain from another rate cut to support below-trend growth," the report noted.

Growth was derailed by the November last note-ban which had hit rural consumption and affected other cash- sensitive sectors such as construction, trade, logistics and SMEs. Subdued demand also aggravated the existing weak spell in manufacturing and capital formation, pushing down growth to 6.5 per cent in H2 from 7.7 per cent in H1 of FY17, it said.

Arguing against a rate cut Firstpost columnist Madan Sabnavis recently said in an article that with an over emphasis on interest rates, the industry and government are missing the hot spot.

"So far the approach has been to have interest rates lowered. Now, interest rates are one component of the growth story and cannot drive economies. If it were that easy then USA would not have taken 10 years to get back on its feet (it has not yet started walking!), and the euro zone and England would not be in a low growth trap for the last 7 years," he said.

According to him, the two steps that are likely to boost the economic activity are increasing the government spending and cutting tax rates for both corporates and individuals. However, these seem to be difficult in a year when the tax revenues may not be picking up due to the GST rollout.

Given the situation, it remains to be seen how the government will be able to devise meaningful steps to boost confidence in the economy.

(With inputs from PTI)

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Updated Date: Sep 21, 2017 10:31:51 IST