Don’t deviate from fiscal consolidation exercise: PM’s Economic Advisory Council

The EAC’s stance contradicts NITI Aayog vice chairman who said last Wednesday that the economy will do well with a fiscal stimulus and there will be no harm if the deficit target is missed.

An advisory group of economic experts constituted by Prime Minister Narendra Modi on Wednesday warned against breaching the fiscal deficit, potentially ruling out the possibility of a stimulus package to revive the sputtering economy.

Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister (EAC-PM), with members Ratan P Watal, Rathin Roy, Surjit Bhalla and Ashima Goyal during a press conference in New Delhi on Wednesday.(PTI)

The comments by the Economic Advisory Council (EAC) come amid India’s economic growth slumping to a three-year low of 5.7% in the April-June quarter, which many experts attribute to last year’s demonetisation of 500 and 1,000-rupee notes. The move sucked out 86% of the currency in circulation from a largely cash-reliant economy.

With growth slipping, doubts are being raised over revenue as the Goods and Services Tax (GST) is expected to impact collections, leaving little elbow-room for the government to dole out sector specific stimulus packages or push up growth with higher capital expenditure.

“The fiscal consolidation exercise should not be deviated from,” economist Bibek Debroy who leads the EAC said on Wednesday after the first meeting of the body.

The EAC’s stance contradicts NITI Aayog vice chairman Rajiv Kumar’s views who said last Wednesday that the economy will do well with a fiscal stimulus and there will be no harm if the deficit target is missed.

Though the government aims to keep the fiscal deficit – the gap between the revenue earnings and expenditure -- at 3.2% of the GDP, it is facing renewed calls from the industry for a booster dose to encourage investments, crucial for creating jobs.

The Modi government is under attack from both the opposition and other organisations allied to its own ideological parent, the Rashtriya Swayamsewak Sangh (RSS), over what they call a “jobless growth”.

Ila Patnaik, a professor at the National Institute of Public Finance and Policy (NIPFP), said a stimulus package will breach the fiscal deficit target that will, in turn, effect India’s credit ratings.

“The trouble of a large fiscal deficit is its tendency to spill over to the current account. And high twin deficits would increase the fragility of the economy,” Patnaik added.

Another council member, Surjit Bhalla, said the EAC was unanimous that “there is a slowdown” in the economy .

“We will examine the causes which could be multiple,” Bhalla said.

Apart from Debroy Bhalla, the other members are NITI Aayog’s principal advisor, Ratan Watal along with economists Rathin Roy and Ashima Goyal as part-time members.

Debroy said the EAC has identified 10 focus areas, including economic growth, employment and job creation, informal sector and its integration and the fiscal framework and monetary policy. Members will prepare reports on the focus areas and discuss them in a “formal meeting” in November, he said.

Chief Economic Advisor to the government, Arvind Subramanian, gave the EAC members a presentation on the economy and Debroy said the council will work keeping in mind that the budget 2018 exercise is already underway.

The government wants to raise its capital expenditure beyond the budgeted Rs 3.10 lakh crore but is cautious that it does not breach its fiscal deficit target. The government has already met 92% of its fiscal deficit estimate of Rs 5.46 lakh crore for 2017-18. Compounding the problem is the reluctance of private investment to pick up.

Several ministries of the government have already been in multiple huddles to look for ways to rev-up the economy. But now the responsibility will rest on the PM’s newly-created economic advisory council.

“The entire thrust of everything we do will be on implementable recommendations,” Debroy said.

The International Monetary Fund (IMF) has lowered India’s growth forecast for the current fiscal by 0.5 percentage points to 6.7%, while the World Bank has pegged economic expansion at 7%, down from 7.2% projected earlier.

The Asian Development Bank too lowered India’s fiscal growth to 7% from 7.4%. The Reserve Bank of India (RBI) had cut its growth forecast to 6.7% from an earlier projection of 7.3%.