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Informist, Wednesday, Jan. 22, 2025

 

--Ashima Goyal: RBI monetary policy actively restrictive for several mos now 

--CONTEXT: Remarks by former MPC member Ashima Goyal in an interview

--Ashima Goyal: Lower real interest rate "effective incentive" to up demand

--Ashima Goyal: Demand recovery requires multiple types of stimuli  

--Ashima Goyal: Tax reforms must simplify, remove loopholes, widen base

--Ashima Goyal: Capex slowdown reversal "will be a stimulus in itself"

 

By Priyasmita Dutta and Shubham Rana

 

NEW DELHI - The Reserve Bank of India's monetary policy has been "actively restrictive" for several months now, according to former Monetary Policy Committee member Ashima Goyal. While the revival of growth requires other actions too, Goyal said a reduction in real interest rates is "one of the most effective incentives to increase demand".

 

Goyal, whose four-year term on the MPC ended in October, voted for a 25-basis-point reduction in the repo rate in June and August, along with fellow external member Jayanth Varma. However, the two were in the minority and the policy rate has remained at 6.50% for two years now. Meanwhile, GDP growth has fallen from 8.2% in Apr-Jun 2023 to a seven-quarter low of 5.4% in Jul-Sep. But for the MPC to be able to reduce interest rates, "the government has to alleviate the supply-side bottlenecks that raise inflation," Goyal told Informist in an e-mail interview.

 

Elevated inflation has been cited by the MPC as a risk to private consumption, with businesses already worried that demand from India's huge middle-class is falling. According to Goyal, even the middle-class has various segments, with companies' premiumisation strategies focusing "largely on the narrower top". As such, the former member of the rate-setting panel isn't surprised that demand growth is seen slowing. "A characteristic of Indian middle classes is mobility, especially at the lower end. Products created for these price-sensitive groups will do well," she said.

 

While income tax cuts for lower slabs can increase spending, Goyal thinks the main focus of the government's tax reforms must be simplification of the system, removal of loopholes, and widening the tax base. "Demand recovery requires multiple types of stimuli."

 

CAPEX PUSH

According to Goyal, the slowdown in growth seen in FY25 can be somewhat explained by the weak progress made by the government on meeting its capital expenditure target. As per the latest data, less than half the full-year target of INR 11.11 trillion was spent in the first eight months of FY25. And reversing this slowdown, Goyal said, "will be a stimulus in itself".

 

"Since the slowdown followed that in public investment despite revenue expenditure being maintained, it is clear that better quality of spending itself provides stimulus--so increasing the share of public investment must continue."

 

As for whether annual public investment had hit a ceiling of sorts at the INR 10 trillion mark, Goyal said improving capacities at state level can raise any such limits which seem to have been reached this year due to the elections. The FY24 budget estimate of INR 10.01 trillion capital expenditure was missed by over INR 500 billion, and most economists think the current year's target could be missed by as much as INR 1.5 trillion. Furthermore, as the economy grows in size, an absolute limit of INR 10 trillion "will certainly not hold," Goyal said.

 

"Governments have to spend on public goods beyond infrastructure, such as air quality, to improve city life and meet net zero commitments. Well-designed PPP (public-private partnership) where government warranties moderate risk for private partners can aid faster expansion and implementation," she added.

 

DEBT REDUCTION

For Goyal, a sustained increase in public investment is compatible with continued fiscal consolidation, although the latter is "essential" given India's general government fiscal deficit--the Centre and states combined--is above 7% of GDP and one of the highest in the world.  However, she advised against more aggressive tightening of the belt than has already been the case, with the negative effects of sharper fiscal consolidation visible in FY25.

 

"Since policy has to be countercyclical, there is no need to tighten more aggressively during a slowdown. Even meeting targets in terms of ratios to GDP becomes more difficult as GDP growth falls."

 

While the Centre is well on track to reduce its fiscal deficit to under 4.5% of GDP in FY26 as per its medium-term roadmap, it will shift its focus to reducing the debt-to-GDP ratio starting FY27. According to Budget documents, the Centre's debt-to-GDP ratio in FY25 is projected to come down to 56.8% from 58.1% in FY24. With little clarity on how quickly the finance ministry will want to bring down the debt ratio, speculation is rife over what targets may be set. Goyal, though, thinks India can painlessly lower the debt ratio thanks to its high growth and low real interest rates.  End

 

Edited by Vandana Hingorani

 

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