Chief economic adviser Krishnamurthy V Subramanian bats for more fiscal spending

 Financial Express,

October 13, 2020

Batting for more fiscal spending, chief economic adviser Krishnamurthy V Subramanian said a boost to infrastructure and employment-related programmes like creation of an urban job guarantee programme would help pep up consumption demand.

The Covid-ravaged economy will likely shrink by a record 9.5% in the current fiscal, Subramanian said on Tuesday, as he agreed with the central bank’s latest assessment of the magnitude of growth slump. However, elevated inflation will still drive up nominal GDP.

Monetising the fiscal deficit in a year like this can’t be ruled out as one of the financing options for the government, the CEA told CNBC-TV18. “We have time-one can do it within the borrowing programme itself-short-term borrowing so as not to increase the yields,” he said.

“We might be looking at about 1.7- 1.8% of GDP ($50 billion) of current account surplus (in FY21),” he noted.

With net tax revenues declining 30% on year in April-August (the budgeted growth was 21% in FY21 over the actual of FY20), some analysts see fiscal deficit even doubling from the budgeted target of `8 lakh crore. The April-August fiscal deficit already touched 109% of the full-year target.

While estimating likely nominal GDP growth for FY21, the government has kept in mind an inflation of 6%, Subramanian said. Retail inflation scaled an eight-month peak of 7.34% in September, much higher than the upper limit of the central bank’s target.

As the government steps in to stir demand in the economy (on Monday, it announced steps to create extra consumption of Rs 1 lakh crore), the CEA said for a sustained demand push to growth, “we need to focus on employment”. Only assurances of income will discourage people from precautionary motive to save, he added.

Spending on infrastructure will create employment and help India get back to the high-growth trajectory, Subramanian said. Citing the example of the Asian financial crisis, he said it was the expenditure on infrastructure that helped India come back to the 8% growth path.

Also, the country is well poised to tide over any external headwind and its current account may swing from a deficit of 0.9% of GDP in FY20 to a surplus of 1.8% in the baseline scenario this fiscal.

A number of established agencies have projected a steeper GDP slide (some expect it to be as much as 15%) for India in FY21 than assumed earlier, after the government announced a record 23.9% contraction, the sharpest among the G-20 economies, in the June quarter. While most agencies have predicted a recovery in FY22 (S&P projects a 10% expansion next.

fiscal), some of them have cautioned that it will be greatly aided by a favourable base and a meaningful rebound will take time to materialise.

The CEA had earlier predicted a V-shaped recovery for the economy, drawing a parallel with a similar rebound witnessed after the Spanish flu outbreak, which was, in fact, much more devastating.

Reference: https://www.financialexpress.com/economy/chief-economic-adviser-krishnamurthy-v-subramanian-bats-for-more-fiscal-spending/2104774/

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