Economic affairs secretary Subhash Chandra Garg is upbeat about prospects for the economy. In an interview with TOI he talks about the government’s efforts to rein in the fiscal deficit at 3.4% of GDP during the last financial year due to lower spending, against the budgeted 3.5% .
What is the outlook for growth and inflation as recent numbers point to recovery?
Inflation is cooling off. Overall annual inflation in 2017-18 turned to be just 3.6%. This is well within our comfort level of 4%. We continue to be in the low inflation band, despite the fact that we had a one-time house rent increase (for government employees). For the coming year, you heard RBI
saying that for the first six months, inflation will be around 4.4% and in the second part of the year, it will be still lower.There is no excessive demand, the fiscal deficit is likely to go down. The trend of industrial growth indicates that we have a revival on the manufacturing side, where growth has exceeded 8.5% for the last few months. I am quite hopeful that we end 2017-18 with about 6.75% GDP growth, which is not bad at all, considering we had massive reforms last year. Everyone in the world, whether IMF or ADB, World Bank or RBI, is pegging the number for this year at 7.4-7.5% and our economic survey mentioned that rate. We can be reasonably confident of having 7.3% to 7.5% growth this year.
Are you confident of industrial growth sustaining at this level of 7% plus?
Yes. There are some proxies. Look at cement consumption, steel consumption, look at hotel occupancy, which is 80% plus or look at growth of airlines. Any of those indicators would now tell you that there is an industrial revival, manufacturing revival, construction revival and services, of course, is getting back to the rate of growth of 9%-10% we have seen.
You tweeted that the fiscal deficit number for 2017-18 is expected to be lower than what you had budgeted for? Is it true that it will be 3.3-3.4% of GDP?
The final deficit (number) is the result of several factors. Revenue is very close to the revised estimate (RE) target, it did not exceed (the revised estimate). Non-tax revenue is somewhat lower than RE. It is a little off the mark, despite RBI (interim) dividend. There has been lesser outgo of capital and revenue expenditure. At this moment, it looks like that fiscal deficit would be 3.4%.
There seems to be friction between RBI and the government…
There is no friction. Absolutely not. The finance ministry has five departments. We debate, we discuss, we have differences of views on certain policy, that’s natural. This is the way it should be. At the end when a decision is taken, it is a common decision, it’s a collective decision. Likewise, RBI and the government also discuss and debate a lot of issues and then come to a decision, which is acceptable to both.
Inflation is under control, growth is beginning to accelerate and the fiscal deficit has also been contained to an extent. Does all these give RBI headroom to ease rates given that investment is low?
Investment revival is expected now. You don’t invest when there is spare capacity, you invest when capacities have been breached and you need fresh capacities. The investment cycle is going to revive and revive strongly.
There comes your next question. How does RBI respond? RBI has been responding, it will respond. Every two months it reviews the monetary policy. Liquidity management is more current, every day they do it. There is sufficient liquidity. RBI takes every factor into account and whatever is appropriate it will decide.
Are you concerned with the level of crude oil price?
Oil prices do play a very material role and if oil prices go up beyond a certain level, it is a cause of concern. I don’t see any possibility of any steady or permanent rise in oil prices. What happened probably in the last one or two weeks is what happened in Syria. These are temporary factors and oil prices will revert to what now seems to be a normal range of $60-70. If that is the level then it is not a cause for concern.
After the problems in the public sector there are now governance concerns with the private sector players. How much of a concern is the turmoil in the banking sector? Will it impact lending?
The banking sector remains very crucial for our growth, financing, credit, poverty alleviation, housing, industrial credit, agriculture credit. We would do well if we take a proportional view of what these developments imply and don’t treat them as having larger than life kind of impact.
In the PSB space, something happened in PNB, that as it turns out now is a localised phenomenon, obviously fraudulent, done by some people in connivance. So, there is criminality associated, which is being investigated by the agencies and culprits will be brought to book. I would like to believe that this is an isolated incident, this does not communicate that PSBs are in any sort of crisis. Likewise, what has happened in one or two private sector banks, is being given larger than life importance. Private sector banking in India is very well established. It should be investigated as it demands. But we should not tarnish the entire banking space with a broad broom and say that everything is wrong.