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Economy doesn’t need fiscal stimulus: CEA
Sceptical about the efficacy of a bailout package to Indian industry, Chief Economic Adviser K Subramanian said any such step will be a “moral hazard” and an “anathema” to the market economy.
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New Delhi
The remarks come amid demand by India Inc for stimulus package to deal with the slowdown in various sectors of the economy. “Since 1991 we are a market economy, and in a market economy there are sectors which go on sunrise and then go through sunset phase,” he said at an event here. “If we basically expect the government to use taxpayers’ money to intervene every time when there are some ‘sunsets,’ then I think you introduce possible moral hazards from ‘too big to fail’ and as well as the possibility of a situation where profits are private and losses are socialised which is basically an anathema to way the market economy functions,” he said.
Echoing similar views, Power Secretary Subhash Chandra Garg said the reduction in interest rate and availability of credit to private sector are better tools rather than providing fiscal stimulus which crowds out money from the market. Garg, who was the finance secretary till last month, said the first quarter growth numbers are likely to be lower than the same quarter last fiscal due to general elections impact on the economic activity. The first quarter number is likely to come on August 31. It might come around 5.5 to 6 per cent. People might treat it as another evidence of a big slowdown. Actually it is not, he said.
“I think the sentiment will change, we need to take a very careful decision. Is the fiscal stimulus based on additional borrowing in the market and cutting down the excess to the private sector of the fund?... We have a problem with the rate mechanism.
“If we further borrow, the rate transmission will not take place efficiently. What works better is faster transmission of rate reduction and availability of credit to private sector is a better way rather than a stimulus,” Garg said. On improving private investment, Garg said there is a need to get into specific sectors. “Investment is going to be key to the growth.
“... let me illustrate with an example, we have a lot of coal in the country. Our annual target is 1,000 million tonne, but we produce 600 million tonne. We import a lot of coal today. What is required to be done is to ensure that we produce 1,100 million tonne,” Garg said. Noting that increasing coal production would require a lot of investments, he opined that it would not come until Coal India has the monopoly.
“Probably what needs to be done in my judgement is to award 100 million tonne annual mining capacity to five big companies. This is the way. Now we have a law... all that is required in the sector is to make sure that we award,” he said.
This is the kind of reform that is required to promote investment in specific sectors. Subramanian too said that the second generation reforms, including pushing disinvestment and labour laws, would help promote investment in the country.
‘Centre to complement RBI’s efforts to beat slowdown’
The government is expected to take policy measures to complement Reserve Bank of India’s rate cut for reversing the slowdown in economy, NITI Aayog Vice-Chairman Rajiv Kumar said. “The RBI Governor has himself said that there are several indications of a slowdown in the economy. That is why the central bank has taken the step of further reducing the repo rate. “So, I think that the RBI having acted, the government will also take steps because it has been recognised that there is slowdown,” he said. In its monetary policy review earlier in August, the RBI lowered the GDP growth rate for 2019-20 to 6.9 per cent, as compared to earlier estimate of 7 per cent. The central bank slashed repo rate for fourth time this year bringing it down to 5.4 per cent to spur growth by providing cheaper loans. There is growing distress across various sectors and industry has demanded sops and relief package from the government to tide over the crisis. Industry captains like Anand Mahindra, AM Naik of L&T, Adi Godrej and many others have flagged demand slowdown in the economy. The country’s automobile sector, one of the key employers in the manufacturing sector, reported its steepest fall in vehicles sales in almost two decades in July leading to massive job cuts across the value chain. “Policy steps are being taken and would continue to be taken to reverse the slowdown. The RBI has already acted and the government is also expected to take some measures to reverse the trend as soon as possible,” Niti Vice Chairman said. The economic growth has been slipping quarter after quarter with January-March period GDP growth slowing to 5.8 per cent in FY19.
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