“INCREASE FISCAL DEFICIT BY TWO PERCENTAGE POINTS; TRANSFER MONEY INTO HANDS OF PEOPLE”

Take measures to boost demand. If unorganised or organised sector is not working, it has a recessionary impact Bimal Jalan, former RBI governor

How do we generate demand in the economy? We should be willing to increase fiscal deficit by 1.5- 2 percentage points. The government has to pump money into the system. To create demand, it has to transfer some money ( into the hands of people). The RBI also has to take steps to reduce borrowing rates. These are good measures, but it does not mean that the growth rate won’t decline. We will, however, be able to ensure that we don’t get into a recessionary condition.

If the government is ready to increase deficit, where should this money be spent?

The usual things, wherever the government is spending, such as public services. It needs to increase direct expenditure in public sector units, and other agencies. So whatever is in the government’s domain, it should do. What is in corporate sector’s domain, it should do that. Corporate sector spending can be boosted by reducing interest rates.

But ( I am again saying) that does not mean we will be able to meet the entire impact of coronavirus on growth rate. The situation is difficult all over the world.

Won't sovereign ratings suffer due to higher fiscal deficit?

No; we are also reducing interest rates, and if demand is not high, inflation won’t increase that much. We are in a situation where we should take some measures to boost demand. For example, if the unorganised or organised sector is not working, and they have no sales, and salaries have been cut… all these have a recessionary impact.

Rating agencies will understand India’s compulsion as the same is affecting all countries.

Some states have been announcing packages. Will this lessen the fiscal burden of the Centre?

States’ and Centre’s roles are not overlapping. States have a different role to play. They have their own administration for which they have to pay, they have their own schemes. The Centre has its own areas and schemes (where it should spend). There is no conflict between the two.