Obliquely — but sharply —criticising the RBI and the monetary policy committee (MPC) for holding rates over the past three announcements and even turning more hawkish since December, chief economic adviser (CEA) Arvind Subramanian on Thursday wondered whether “we (haven’t) overachieved on inflation well in advance of scheduled targets”.
“True core inflation” had declined steadily over the last seven months and was on target to achieve the medium-term inflation target (4+/-2%), he noted, and asked whether inflation pressures weren’t easing considerably. “Going forward, wouldn’t an appreciating exchange rate dampen inflation?” he asked. Immediately after demonetisation in November, the dominant view among the analysts and investor community was that the RBI would cut interest rates (there had been a declining trend in inflation since Q2FY17 and the note ban was expected to have a short-term adverse impact on growth), but that was not to be. So, real repo rate (nominal rate minus CPI headline inflation) increased between July 2016 and January 2017.
In one of the most candid assessments of the macro-economic policy by a serving CEA, Subramanian rued why a “reasonable” voice was not being heard that the economy needed all the policy support — both fiscal and monetary — that it could get at this juncture. Delivering the VKRV Rao lecture in Bengaluru, he derided analysts “falling over backwards” to rationalise official decisions and ascribing “ex-post logic” to them, while they and stakeholders like bankers should not have held back their objective assessments.
Giving his thoughts in the form of a set of questions, which objective analysts would have asked about the macro-economic policy, the CEA said while real economic activity remained “weak and well below potential”, the fiscal and monetary policies remained tight.
Official core CPI inflation — which excludes prices of food and fuel but not transport services which are also kept out in the “true core” formulated by the CEA — has remained rather sticky in recent months, despite the fact that the headline CPI eased considerably from its 2016-17 peak of 6.07% (in August last year). While core CPI remained in the range of 4.5-5% in the past one year, headline CPI started declining since August last year to touch a record low of 3.17% in January before inching up to 3.81% in March.
General government capital expenditure, helped in good measure by Central public-sector undertakings, rose from 6% of the GDP in FY16 to 6.6% in FY17 (revised estimate), but is projected to fall to 6.3% in the current financial year. The Centre had met the fiscal deficit target of 3.5% of the GDP for FY17, a smaller deficit of 3.2% is projected for the current fiscal.
The Fiscal Responsibility and Budget Management Committee, headed by NK Singh, has recently recommended that the Centre should aim for a deficit of 3% of GDP for three straight years starting the current financial year itself and gradually reduce it to 2.5% by FY23 and partner states in adhering to fiscal discipline. The fiscal spotlight is back on finances of states. Between FY13 and FY17, while the Centre has cut its fiscal deficit from 4.9% of GDP to 3.5%, states’ deficit is believed to have gone up from the reported 2% of their GDP to slightly higher than the projected 3.4% in FY17. However, given the current state of the economy, the CEA is apparently suggesting a fiscal policy that is not “irresponsibly responsible” and too tight.