Deficit control key to containing market interest rates – The Hindu BusinessLine

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Consumption revival: India is more of a domestic-demand-driven economy. The proportion of private final consumption expenditure (PFCE) declined to 54.5 per cent in Q2 FY22 from 60.2 per cent in Q3 FY20. While PFCE growth is crucial for GDP growth, the average PFCE growth for the last six quarters has declined to (-) 1.6 per cent from 6.2 per cent in the preceding six quarters. Declining employment and low wage growth are mainly responsible for weaker consumption growth.

Investment revival: According to Ind-Ra, due to the low base of FY21, investment growth in FY22 is expected to increase to 9.1 per cent in FY22. However, the level of investment will still be 2.7 per cent lower than in FY20. Private corporates and household sector contribute more than 75 per cent to investment. Household sector includes unorganised/ unregistered MSMEs and this sector has been badly affected in the past couple of years. The government’s contribution to investment is only 12 per cent, because of this the government has limited ability to push investment revival in the economy.

Weak demand, excess capacity and stretched/leveraged balance sheet of infrastructure players will continue to have an impact on investment demand. Revival of Indian exports is a comforting factor, however, unless domestic demand revives, it will be very difficult for the economy to have a sustained investment demand.

Containing fiscal deficit: High deficit and debt are two features of the Indian economy. However, higher GDP growth has been a safety net for debt sustainability in the past. Indian public finances suffer from expenditure rigidity, a large proportion of current expenditure is committed in nature (salary, pension and interest payment).

Fiscal consolidation is mainly revenue driven, as witnessed in during 2003-09. Not only the deficit, its quality and leverage improved during the period of higher economic growth. Higher deficit and thus borrowing exert pressure on market interest rate. Despite excess liquidity/loose monetary policy, market interest rate has remained elevated in the economy. Deficit control will not only help in containing market interest rate, it will also help the government invest in prioritised areas — social and physical infrastructure.

Household savings revival: Household is an important economic agent in the economy, and its contribution to gross value addition, savings and investment is highest. It is the only economic agent with surplus savings. The excess savings of the household sector finance the negative savings-investment gap of other sectors — general government, private corporates and public corporates. At a time of declining income growth, households have financed their consumption growth by dipping into their savings and increasing leverage.

The author is the Chief Economist with India Ratings & Research

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