The central government should prirotise job creation, increase public capex, introduce reforms in governance of PSUs/PSBs, and grant tax reliefs to the middle class in the upcoming Union Budget for FY26, TT Ram Mohan, member, Economic Advisory Council to the Prime Minister said. In an interview with Priyansh Verma, he said some budgetary long-term targets, such as that of the fiscal deficit, are not helpful in practice, however attractive these may appear in theory.
Q. What should be the focus areas of the upcoming Union Budget?
A. Sustaining GDP growth by maintaining public capital expenditure at least at the level of last year, maintaining fiscal consolidation but not overdoing it, maintaining the focus on the job-creation incentives announced in last year’s budget, and pushing through governance reforms in PSUs/PSBs, such as measures to strengthen boards of directors, should be the focus areas, in my view.
Q. How can the Budget boost urban as well as rural consumption?
A. Some modest tax reliefs to the middle class (say, in the income range of Rs 10-15 lakh) can help consumption in general and may be expected. But the real boost to consumption can come only from job creation and better wage increases than we have been seeing in recent years.
Q. Are there some priority sectors that the Budget should increase outlay on?
A. Infrastructure and job creation.
Q. What’s India’s growth potential? How do you see growth averaging in this decade?
A. The Chief Economic Advisor has said that GDP growth of 6.5-7% in the next decade is feasible. That is an appropriate target to aim at. Aiming for a growth rate of more than 7% or even 8% may appear macho but is not terribly realistic, given the current global scenario and the realities of the Indian economy.
The growth rate target has to take into account not just the economic potential and considerations of economic efficiency but such considerations as equity, macroeconomic stability, financial stability and national sovereignty. A growth target of 6.5-7% does precisely that. I would add that achieving such a target would be no mean achievement.
Q. Should the government fix a medium-term target for GDP growth, and link it to reforms implemented in Budget? Is there a need for an accountability mechanism to be put in place, like the FRBM, to assess whether the goals of Budget were achieved or not?
A. Such targets are not helpful in practice, however attractive these may appear in theory. The government used to present a glide path for the fiscal deficit for three years or so but this was seldom adhered to. The FRBM targets have proved elusive for nearly two decades now. In the last budget, the finance minister indicated that the focus would be on the debt to GDP trajectory hereafter rather than on the fiscal deficit itself, which, in effect, means that fiscal deficit targets will not be set hereafter. A government’s economic performance is one of the factors that influence election outcomes and it’s hard to think of an accountability mechanism that is superior to that.
Q. With respect to freebies, is the current political situation not legitimising this concept? Should the Election Commission of India make rules to ban or restrict freebies?
A. We have now a plethora of subsidies at the centre as well as the states. Perhaps Niti Aayog can take stock of the totality of the benefits reaching disadvantaged sections and the centre and the states together can arrive at a mix of freebies that makes economic sense. It is not desirable for the Election Commission or the judiciary to get into this matter. What is ‘welfare’ or what is a ‘freebie’ is a matter of definition and interpretation. It is for the political authority to decide what the trade-off between freebies and investment at any given point is- and leave it to the electorate to judge the outcomes.
Q. Indian rupee has depreciated against the USD considerably in the past three-four months? How do you see it performing going forward?
A. There is a perception that the rupee is now correcting for appreciation of the real effective exchange rate (REER) since FY21 and there is a clamour for further nominal depreciation on this count. The REER, as everybody knows, is the true measure of competitiveness of an economy’s exports. The REER has appreciated by 3% over the past year, for instance (December 2023 to December 2024). However, if we take a longer period, say, 2019-20 to 2023-24, we see a depreciation in the REER. Viewed over a long time-frame, it’s not clear that a nominal depreciation is needed to restore competitiveness.
However, the argument that the country runs a persistent current account deficit and this is bound to result in nominal depreciation is valid. From a short-term perspective, a steeper than usual nominal depreciation appears inevitable given the Trump effect and the strengthening of the dollar against all currencies. The much-touted increase in tariffs in the US is yet to be rolled out. How much further the dollar strengthens the short-term will depend on the magnitude and pace of tariffs. It is realistic to expect further nominal depreciation of the rupee in the months ahead.
Q. What threats of depreciating rupee do you see on Indian economy?
A. The challenge always is to ensure that any movement in the exchange rate is not so sharp as to be disruptive. While, as mentioned, nominal depreciation of the rupee is to be expected in today’s context, it is vital to manage an orderly fall in its value relative to other currencies. Any perception of a steep fall in the rupee could, for instance, see FIIs heading for the exit in an even bigger way than has already happened and that would cause the rupee to plummet even more than warranted by fundamentals. The RBI’s policy, for quite some time, has been to manage volatility without attempting to influence the direction of the exchange rate. With the tools at the RBI’s disposal, one can expect the RBI to continue to manage the exchange rate in ways that will not unsettle the economy. It is not appropriate to give currency to alarmist views of the challenges on the external front and in respect of the exchange rate in particular.
Views are of the member alone and do not represent that of EAC-PM.