PMEAC's economy revival strategy: Why Narendra Modi shouldn’t shy away from fiscal stimulus

Prime Minister’s Economic Advisory Council (PMEAC) doesn’t like the idea of a fiscal stimulus. It wants the Narendra Modi government to stick to the fiscal deficit roadmap and look for green shoots in the economy for gradual recovery. “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, reported Business Standard. PMEAC’s obsession with the fiscal deficit numbers isn’t hard to understand. While assessing the fundamental strengths of an economy, rating agencies and multilateral agencies attach major significance to the fiscal deficit numbers. It indicates the stability of an economy along with certain other critical parameters. Loosely defined, fiscal deficit is the difference between total expenditure and the revenue generated by a government. The smaller the figure, the better the economy looks to the outside world. [caption id=“attachment_4135661” align=“alignleft” width=“380”]  Reuters[/caption] Under the fiscal responsibility and budget management (FRBM) target, India has aims to achieve a fiscal deficit of 3 percent of the GDP in the years up to March 31, 2020. This year, the target is 3.2 percent. If the rumored fiscal stimulus package of Rs 50,000 crore becomes a reality, a back of the envelop calculation shows that this could result in an increase in the figure to 3.5-3.7 percent. But, the point here is, at a time the economy is facing a deeper slowdown, deviating from the fiscal deficit roadmap for a year to support the growth momentum isn’t a bad idea. World over, governments have loosened their purse strings when their respective economies have faced a major prolonged downturn. The symptoms that characterise India’s current economic slowdown are not too insignificant to discard as a minor blip. The economy appears weak on multiple fronts. Private investments are not picking up despite sustained efforts by the Modi government, factories are cutting jobs and not creating enough new ones, banking sector is neck deep in bad loans and demand is generally weak resulting in poor bank loan offtake to large industries. With private sector investments remaining subdued, the onus to take the economy out of the slowdown phase largely rests with the government. If an economic stimulus is warranted, it should be done. Deutsche Bank (India) chief economist Kaushik Das is quoted in this report in The Economic Times report as saying, “The authorities should make it clear that this is a one-off deviation to support short-term growth affected by demonetization and GST, and that next year the endeavour would be to return to the FRBM-directed fiscal path.” In a chat with Firstost in the ‘State of the economy dialogues’, a special series on economic debate, Care rating agency, Chief economist, Madan Sabnavis too said the government shouldn’t hesitate to go for an economic stimulus even though it may result in deviation from the FRBM numbers. If the government pumps in money into key areas, mainly to push key infrastructure projects, recapitalise banks and cut tax rates, this could help revive demand. There is no way the government can go for a stimulus without diluting the fiscal deficit target. Already, the fiscal deficit has touched 96 percent of the budget target until August — first five months of the fiscal 2018. During the same period of 2016-17, it was 76.4 percent of the target. The RBI too is not in favour of a dilution in the FRBM roadmap. Governor Urjit Patel has cautioned against fiscal slippages. While a deviation may irk the rating agencies, Indian policymakers should be more worried about the faltering growth since it has cascading impacts on the economy in terms of lesser jobs, industrial activity and flow of private investment into the country. The growth scenario is worrying not because of a one-quarter slowdown but as mentioned in an earlier article , the problems can be traced deeper to the ground level. The PMEAC has identified ten key areas where the government needs to act. But, one must remember that everyone knew where the problem lies. What the economy urgently needs is solutions to come out of the slowdown phase. Among them, demand revival is key. If that warrants an economic stimulus even at the cost of a higher fiscal deficit, so be it.