Don’t be reckless

Don’t be reckless

Budget must avoid large spending commitments which threaten macroeconomic stability.

Speculation about contents of the forthcoming Budget, the final one for NDA government, has revolved around expenditure packages for specific sections of the population. It comes in the wake of large spending commitments made by states to alleviate agrarian distress. It’s in this context that one should heed the sagacious views of RBI governor Shaktikanta Das. He has pointed out that while India’s macroeconomic indicators are sound, challenges have not receded. India cannot overlook threats emanating from global economic trends. This will require governments to avoid competitive populism.

Relatively low inflation is one of the standout economic features of the current government. However, it’s a mixed blessing. Two factors, collapse in prices of oil and food, contributed significantly to it. Deflation in food also catalysed rural distress which now threatens to upend the fiscal situation. Even in the absence of a crisis India, both states and Centre collectively, has barely registered progress in lowering the level of fiscal deficit relative to GDP between 2014 and 2018. It highlights a challenge which requires prudence on the part of finance ministers. Fiscal recklessness will also heighten vulnerabilities on the balance of payments front.

The current year presents two threats stemming from global economic developments. According to IMF, global economic expansion is weakening and at somewhat faster than expected pace. Perhaps the biggest threat to the global economy, other than trade wars, comes from a slowdown in China’s economy. In 2018, China grew at 6.6%, the slowest pace in 28 years. Unpleasant news on these fronts can trigger volatility in financial markets. In this context, it is important that India is not perceived as an economy in populism’s thrall.

States in India have taken on commitments which have begun to adversely impact capital spending. Simultaneously, the Centre has committed to reducing both the level of its fiscal deficit and aggregate debt. It is important to see through these commitment as it prevents governments from crowding out resources for the private sector. It must be kept in mind that the best news emanating from economic data over the last year is a gradual revival in investment. Robust investment demand is essential for durable economic growth. One way to push this process along is by creating conditions for a lower interest rate. The key to it is for governments to be disciplined about borrowings.