Taking part in the India Development Debate with ET Now, Bimal Jalan, Former Governor, RBI, says taking everything into account, there are always tradeoffs in making policy but whether the rupee should be 64 or 66 is not an issue.
Looking at the big picture, do you believe a fiscal stimulus is perhaps unavoidable now? Is the economy really in dire need for a stimulus right now?
We have to wait and watch in the sense that there is always a cyclical downturn and there could be structural downturn. We have to make a distinction. We have to wait and see what the government is doing in terms of increasing investment which has already been announced in terms of implementation of projects, in terms of implementation of GST and so on.
If all this works out, I have a feeling that in about say six to nine months, we would see the economy picking up again. Of that, there is very little problem because all our potential is very high without any doubt.
Stimulus will mean additional spending. Do you think the government is doing the right thing by creating a fiscal space for stimulus. Our own estimate is that they are likely to breach the fiscal deficit target for this financial year? Do you think the government is doing the right thing there?
No I think we should.There are two high priorities. One is implementation of projects. For that, the fiscal provisions have already been made for the projects which are on the ground. The second part which is equally important is that we should be willing to have a higher fiscal deficit than is planned T 3.2%. While the country is concerned given the fact that we have inflation which is low, given the fact that we essentially have all the fundamentals of factors of production which are in our favour, even with the decline in investment rate, we still have investment rate of about 27% or so and we have enough capital, enough corporates and so on
There is a fiscal deficit target and we have set it at 3.2% and which is absolutely fine so far is next year is concerned. But in case we can do expenditure not on the administrative part, not on subsidies but on investment, the main problem is implementation. If the fiscal deficit goes up from 3.2% to 3.4%, we should be willing to accept it.
Would not you urge and expect the government to get out of non-core businesses? Okay let us not talk about divestment but let us talk about businesses that the government has no business to be in – hotels, airlines. Why is the government in these loss-making ventures when it can actually easily sell and raise good money?
No, that is a long run issue and I do not think we should associate it with the current situation. They were loss- making earlier, they are loss-making now. So that is a policy issue and we have to then look at the employment part. If you have a loss-making public agency which is delivering goods and services to the people, then that is a different point altogether. In rural areas or in remote areas and so on. This is not in the highest priority just now.
We all know stimulus will be inflationary. It will have repercussion on interest rates especially given the fact that RBI is now in inflation targeting regime. Do you believe India can afford higher inflation and higher rates that could be fallout off a stimulus package?
At the moment, we are in a very fortunate position. Inflation is low. Suppose inflation increased by one percentage point, then we are still in 4%-5% zone which is the inflation targeting framework of the government. So there is no particular problem on that score as you can see. If interest rates are increased by 0.25, 0.25 to 0.5%, it does not matter.
On currency, especially given the pain that exporters are in, we have had the CII today make a pitch to depreciate the rupee. Do you see a merit in that argument whatsoever?