In such a scenario, we should be realistic as well as comfortable if the government were to exceed the stated fiscal deficit target of 3.3%.
By Shanti Ekambaram
Growth vs inflation – these are the two big data trends that will guide the Monetary Policy Committee (MPC) when it delivers its fifth bi-monthly Monetary Policy Statement for FY2019-20 on December 5. In addition, chances of a higher fiscal deficit as against the budgeted target of 3.3%, and its likely impact will be part of the discussions.
The first key point is that growth slowdown has deepened with the September 2019 Index of Industrial Production (IIP) hitting an almost eight-year low at (-) 4.3%. While the GDP for the quarter that ended in June expanded 5%—at its slowest annual pace since 2013, the Q2 FY20 GDP growth has come in at 4.5%. This despite various measures taken by the government. While the government’s `1.45 lakh crore fiscal boost to corporate India has certainly improved sentiment, in the near-term, this is unlikely to contribute significantly to growth with muted private investment and consumption demand. This trend is seen across sectors. Despite a good monsoon, due to unseasonal rains and floods in many states, agriculture has been hit and there is stress amongst farmers and in rural wages. All this has hit consumption as well. There was a brief spike in demand during the festive season, but the key is sustained demand.
To add to that, inflation has also slowly crept up. The consumer price index-based inflation hit a 16-month high in October at 4.62%, much above RBI’s medium-term target of 4%. So far, the MPC has been guided by benign inflation and has reduced the policy rates by 135 basis points since February 2019 in light of a slowdown in growth and low inflation. Now, with inflation on an upward trend, albeit transitory, the MPC is faced with a difficult choice. The committee will continue to focus on reviving growth as their primary objective while keeping a close eye on the inflation readings.
In such a scenario, we should be realistic as well as comfortable if the government were to exceed the stated fiscal deficit target of 3.3%. The real issue facing the economy is that of growth and thus, the government must boost spending in areas such as infrastructure to kick-start the economy. The need of the hour is for investments and given that private investment is muted the government has to step in and provide support. Expect the fiscal deficit to be closer to 3.7% of GDP.
The monsoon season went off well; however, unseasonal rains have wreaked havoc. The sharp rise in retail inflation is expected to be transient in nature because of seasonal concerns—core inflation is slowing down. The real problem, thus, is the slowdown in growth.
Considering this, RBI will cut rates up to 25 bps. It will then keep a watch on movement in crucial macro data to decide on further policy announcements. There is a need for concerted action between fiscal and monetary policy for revival in growth and consumption.