Fiscal Consolidation Is a Must

The time is not conducive for expansionary monetary policy until the toxic assets of banks are cleaned up says N R Bhanumurthy, Professor and Secretary, The Indian Economic Society, National Institute of Public Finance and Policy

The fiscal deficit has already touched 75 per cent of the target in the first five month of this fiscal year. Do you think the FM will be able to contain it within 4.8 per cent of the GDP for FY14? 

I am optimistic about the FM achieving the target of containing the Fiscal Deficit within 4.8% of the GDP for the current year. There are some measures that have been taken recently to cut the non-plan expenditure. Together with this, some measures on the disinvestment front could help in achieving revenue targets. The most important factor here is, we are not expecting any pre-election sops. On the other hand, not achieving the target could lead to a downgrade, which could become a major political issue than relaxing the fisc for some sops.

How do you see the rupee panning out in the remaining part of FY14? 

One would not expect the kind of volatility that the Rupee has experienced between May and September of this year. It should stabilize around 60-62 to a dollar. This is on the assumption that the US would not default on 17th October.

Last fiscal was bad for the Indian economy and nothing has changed in the first quarter as well. July provided some hope as IIP numbers showed a growth of 2.7 per cent on a YOY basis. Do you think this is a real turnaround for sustainable growth? 

First quarter indeed was a bad period for the economy. My guess is that, even the second quarter would not be very different. Yes, there are some signs of green shoots that appeared in the IIP as well as in export growth. However, the August numbers for IIP show that the recovery may be short-lived. One important leading indicator for future IIP growth is the non-oil imports, which at the moment is sharply negative. Overall, our assessment is that agriculture could be a major driver of recovery and this should happen from the third quarter.

What kind of GDP growth do you foresee for FY14, given the national and global challenges? What are the constants we should have, to grow at that pace? 

What IMF looks at is the GDP at market prices. In India we look at factor cost side of GDP, which is quite different. This year, our own estimate is about 5.6 per cent, and this is on the assumption that the second half would see a sharp rebound in the demand for industrial commodities. In the medium term, i.e, by the end of 12th Plan, we should be able to achieve around 7 per cent, provided there is a strict adherence to fiscal consolidation. The recovery in EU as well as in Japan is good news for India, which will help exports to some extent.

How do you expect India to close this fiscal in terms of Current Account Deficit? 

CAD for the current year could be around the range of 3.5%. But this CAD is in the absence of strong growth, which is a cause for concern. Theoretically, high growth should be followed by high CAD. This year it could be opposite. Probably, one may need to look at non-gold CAD if one has to link with growth. 

Do you think the government will be successful in getting new investments without drastically changing present environment or have we missed the Bus? 

Two promises that India has made to the international community (rating agencies) is that CAD at USD 70 billion and FD at 4.8 per cent. While the recent trend in trade ensures that the CAD target (or even lower than that) will be met, FD would be a challenge. But attracting investments is a medium to long term issue and that needs to be addressed through structural issues that are highlighted in the question. But more than this, it is the confidence on India that could drive investments. Recently, there were very many measures such as relaxing some FDI limits, land bill, pension and insurance bills, etc. However, FDI flows would take a longer while, even if one brought in all these changes. States have equally important role in attracting investments. There are other sectoral issues such as coal, power, etc., which need more efforts in terms of regulatory policies.