Monday, February 16, 2015

Government mustn't get fixated on the fiscal deficit.

Should the government stick to its fiscal road-map- 4.% for fiscal deficit/GDP in the current year and a lower deficit the next year? Ruchir Sharma argues in today's TOI that it should. He gives instances, such as China, where an increase in government spending has been followed by lower growth rate.

I disagree. China is over-invested in infrastructure. We are under-invested. Without infrastructure investment, it's hard to see investment in general reviving. And the private sector is in no position to get into infrastructure now. So, the government should go ahead and spend on infrastructure- and it doesn't matter if it's about half a percentage point away from its fiscal deficit targets. Here's my case.

India's debt to GDP ratio of around 65% today is among the lowest in the world today. So, considerations of sustainability of debt need not deter us. The only case can be that higher spending will spur inflation which will undermine our currency. The inflation rate has declined sharply, our external account has improved considerably and quantitative easing in Europe and Japan can be expected to offset somewhat the effect of any rise in the interest rate in the US. So, concerns about the impact of the rupee are not a factor either.

Whichever you look at it, this is the right time for Jaitley to go out and spend boldly.


Anonymous said...

Hi Prof.,

SS Tarapore appears cautious in this as he argues in this article:

I think for infra, we should start looking at bonds and encourage household savings/investments in that direction rather than equities which donot help in developing the real economy unless it is primary market driven. Govt has started by expanding the Comm. Trans. Tax list. How about reintroducing Long term cap. Gains tax and redefining short term period for 2 years to reduce speculation.

Good to be unpopular with equities.

- deeps.

tanimaraghu said...

Read your articles. I am really impressed that you take out time to write so that people like us can have an insight to the various social aspects of the society. . I would be really glad if you have anything to say about the falling prices of crude oil as well. How will India be affected by it?