‘No need to tinker with India’s inflation target’
The current target under the monetary policy framework has worked reasonably well, says Principal Economic Advisor
The inflation target — up for review — may not see any change. The Centre believes the current target under the monetary policy framework has worked reasonably well. In conversation with Shrimi Choudhary, the finance ministry’s Principal Economic Advisor SANJEEV SANYAL says the target range of 2-6 per cent does not require any tinkering. Edited excerpts:
Do we see any change in the inflation target framework?
As far as inflation targeting is concerned, the current system has worked reasonably well for what it was designed to do — bring down inflation. Also, it’s a reasonable range of 2-6 per cent. Perhaps the Consumer Price Index basket can be appropriately updated.
The finance minister had said this was going to be an extraordinary Budget. Did it live up to expectations?
This is undoubtedly an extraordinary Budget. It shows how we intend to reflate the economy in the short term, as well as change the underlying dynamics of our growth strategy in the long term. Through the course of one year, India had a very different strategy. We did not do big-bang stimulus. There was no point in pushing the accelerator when our foot was on the brake. There was no point in trying to expand demand when supply was constrained. The government will now use infrastructure investment to drive demand. If you read the last few Economic Surveys, we made a very clear case for investment-driven growth. If there was ever a time for shifting India to an investment-driven path, this was it.
“WE DID NOT DO BIG-BANG STIMULUS. THERE WAS NO POINT IN PUSHING THE ACCELERATOR WHEN OUR FOOT WAS ON THE BRAKE”
The Budget has taken a supply-side approach by focusing on capital expenditure (capex). One, it is important to keep taxation rates stable. Two, they need to be competitive. Eighteen months ago, we significantly lowered corporate taxes. They are now more than competitive. There were nonetheless some Usbased economists who were of the opinion we should increase taxes. In my view, these economists should advise the US government to sharply increase tax rates.
The Budget overhauls the fiscal consolidation road map.
The 9.5-per cent of gross domestic product (GDP) fiscal deficit for this fiscal year happened due to a number of unavoidable reasons. The pandemic meant we had to spend more on health and welfare on the one hand. On the other, the disruptions in economic activity meant that revenue had dropped. We have opted to provide stimulus while maintaining a glide path. The deficit number of 6.8 per cent for the next year takes into account both the need for some consolidation while continuing demand support. Then comes the question of our Budget assumptions. Most of our assumptions — for growth, revenue, and buoyancy — are more than reasonable. If anything, they are conservative.
Why is there a need for extra borrowing?
We have to keep adjusting the borrowing programme to deal with changing circumstances. I don’t think the extra borrowing is a large deviation that should surprise the markets. Bond yields have barely budged. What we are doing is a very calibrated approach to fiscal management. We have been very restrained, and we will remain conservative. Do not confuse our willingness for growth as having given up on fiscal restraint. We will continue to spend very responsibly.
Why is there a difference in nominal GDP numbers in the Budget and in the Economic Survey?
The Budget is based on a little over 14 per cent nominal GDP growth rate. That is, if anything, a conservative number. What we have in the Economic Survey of 15.3 per cent is perhaps a more realistic view of what will happen. My personal judgment is that even the Economic Survey is probably going to be exceeded because it is based on 11 per cent real GDP growth rate. The International Monetary Fund thinks we are going to grow 11.5 per cent in real terms. The Budget quite correctly, under-promises and hopes to over-deliver.
India’s sovereign rating has been a key concern. Will it affect investment?
We have presented clear data in the Economic Survey to show that based on objective indicators, India is rated way too low, given its ability and willingness to pay. Nonetheless, it was necessary, perhaps, to simply spell out in black and white that India’s ratings do not reflect its strengths and fundamentals.