Moneycontrol
Dec 08, 2017 02:26 PM IST | Source: Moneycontrol.com

Move away from fixation of targeting fiscal deficit or inflation: Ex-RBI Guv Bimal Jalan

"There is a fixation somehow among all of us to have target-related fiscal policy, fiscal deficit, how much it should be, why it should be, what is the trade-off between what you say growth and inflation and so on," he said speaking at a seminar at the RBI-promoted IGIDR (Indira Gandhi Institute of Development Research) in Mumbai.

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Former Reserve Bank of India Governor Bimal Jalan today called for moving away from the "fixation of targeting” fiscal deficit and inflation numbers and instead judge a government based on the outcomes its economic policies achieve.

"There is a fixation somehow among all of us to have target-related fiscal policy, fiscal deficit, how much it should be, why it should be, what is the trade-off between what you say growth and inflation and so on," he said speaking at a seminar at the RBI-promoted IGIDR (Indira Gandhi Institute of Development Research) in Mumbai.

"Just ask yourself, does it matter so much, whether it is 3.2 or 3.4 percent. Does it matter for the people of India?"

Addressing economists and students (future economists) of the institute, he added, “If you find that something in the interest of India is not happening, then you hold them accountable..But we hold them accountable for target of 3.2 percent, for 4-6 percent. …How many regulators are involved in getting done anything.

“We have to think about those major issues, how to reduce the role of government and that doesn’t mean we are not holding them responsible for the development of the country. It simply means get it done.”

Jalan's comments come days after official data revealed that the government has exhausted 96 percent of the budgeted deficit target by October with five months to go for the fiscal end; Jalan clarified that he was not calling for restraint.

According to him, "Don't judge the government in terms of performance (on the number), judge the government ... (on) whether what is being done in terms of policy is leading to outcomes that we have promised like investments.

“My suggestion to all of you is to move away from fiscal targeting. And moving away from fiscal targeting does not mean that we should have high inflation or high interest rates," he said, adding that one should let the Parliament and the people of India decide after that.

On inflation, where the Reserve Bank has been mandated to ensure that the price rise is contained at 4 percent in the medium term with a flexibility of 2 percentage points on either side, Jalan reiterated his call for moving away from a targeted range, and pointed out that there can be circumstances like a drought or external events which may lead to the resolve being tested.

It can be noted that the rating agencies take a very critical view on fiscal slippages, because of the macroeconomic instabilities like inflation that it results in.

Jalan's successor at the RBI, YV Reddy, who was also present in the audience, possibly referred to the same aspect, saying it is welcome to look at fiscal sustainability in a broad aspect, but underlined the need to convince the market about it.

"I think sustainable fiscal deficit, its macroeconomic analysis is good. But in reality, are we able to convince the market? Finally, fiscal sustainability is whether you can raise the money?" Reddy said.

Even as the country has moved up multiple notches on the rankings in ease of doing business, Jalan said there continues to be a slew of regulatory nods which are required for an act like investing in roads and wondered why this happened even when we have a government with full majority in power.

Jalan also pitched for a reform in the way the Parliament functions, stating that the current way of doing business which sees adjournments, shorter meetings and passing of laws sans debate through voice votes, is not what our constitution envisions.

"What is the government doing to reform the working of the parliament? It adjourns, meets for two days, most of the resolutions and policies are passed by voice vote, there is no communication between political parties, that was not the intention in the India's Constitution. The majority government is accountable to the Parliament and the Parliament is accountable to the people of India."

Stating that we are the country with "the largest election and also the largest number of people below poverty line in human history", Jalan said chasing growth should not be our main objective.

Growth, he said, is only the means by which India can ensure that it will be "able to provide basic means of living to everyone".
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