The ailing economy needs a joint effort by the government and the Reserve Bank of India
(RBI) to engage in countercyclical fiscal and monetary measures, even at the risk of pushing fiscal deficit to 3.8 per cent of gross domestic product (GDP), according to Indranil Sengupta, chief economist, BofA Securities. The government has set a fiscal deficit target of 3.3 per cent for FY20.
The deficit can come down to 3.5 per cent of GDP in 2020-21, but the growth slowdown, which seemed to have bottomed out in November and December, needs some strong measures. Such countercyclical measures would hardly be inflationary in the absence of a robust private sector investment drive. “When there is no private sector, why would higher expenditure by the government lead to inflation?” said Sengupta in a media interaction while discussing outlook for 2020.
Even if there is some inflation, it is imperative that the government addresses the growth question first rather than thinking about future inflation, he said.
The reason for the current slowdown is high real rates in the past, and delay in recapitalisation of banks, among others. Relative to the core wholesale price index (WPI) based inflation, which measures the pricing power of companies, interest rates in the economy have remained too high, Sengupta said. The concept of consumer price index (CPI) based inflation doesn’t capture this trend as much as WPI, as the CPI is used for cost of living, whereas WPI reflects the fall in commodity prices and ultimately the pricing power of the companies. And so, even as the real interest rate seems negative in CPI terms, in WPI terms, it continues to remain high.