MC EXCLUSIVE Govt to stick to fiscal deficit target, no space for easing, says PM-EAC chairman Mahendra Dev

Professor Mahendra Dev, chairman of the Economic Advisory Council to the Prime Minister (PM-EAC)

• Government aims for 4.4% fiscal deficit, no room for further easing
• Debt-to-GDP ratio targeted to fall from 56.1% to 55% next year, 50% by FY31
• India-EU FTA expected to boost exports and diversify trade partners

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The Central government will stick to its goal of 4.4 percent fiscal deficit as there is no room for further easing, said professor Mahendra Dev, the chairman of the PM-Economic Affairs Council. However, the government now needs to target its debt-to-GDP ratio, which currently stands at 56.1 percent, he said in an interview.

In addition, the top economist said the recently concluded India-EU free trade deal will help soften blow from external factors, as New Delhi seeks to cut trade dependence on few countries. The professor also expressed confidence that India will grow at 6.5-7 percent in FY27.

Edited excerpts: 

You have described India EU-FTA as transformative. What are the implications short-term and long-term implications?

The India-EU FTA is being called as the mother of all deals because 2 billion people and 27 to 28 countries are involved. So, it's a great opportunity for both sides. India will benefit with exports in many labour-intensive commodities like textiles, gems and jewelry and auto parts.

And similarly, Europe will benefit from their exports of many commodities to India, including wines and luxury cars. So, it's mutually beneficial for both and part of diversifying exports to other countries. India has sealed several trade deals in the last two years or so. So, I think India is trying to diversify, avoiding dependence on few countries. That’s the strategy.

Does the India-EU FTA cushion us comfortably against other external pains?

Yes, most of it. Of course, in the short term, there may be some problems. For example, textiles and others sectors may get affected. But I think in the next one or two years, we can have more diversified exports. So, in that way, India's growth is not affected due to US tariffs.

So, what kind of policy interventions will enable our businesses to deal with those regulatory hurdles, especially with CBAM?

As the finance minister, commerce minister mentioned, it is for all the countries. So, I think that can be probably negotiated. Then we have to be more technology-oriented where carbon emissions can be reduced.

From a policy perspective, do you think there is room for more support to MSMEs for easier tech access?

I think the government is already taking a lot of measures for MSMEs. There are three main problems for MSMEs. One is credit, the working capital, particularly, and then technology, they have to adopt technology. And third is marketing. I think government facilitates some of these things. And then, of course, large corporate sector also has to help the MSMEs.

You have said a weakening rupee is not a structural issue. What can the budget do to address the capital outflows?

Weakening rupee has an impact on imports, particularly because we also import some of the commodities for export purposes, so that cost will increase. But on the other hand, why I said it's a cyclical, not a structural one problem is because it has happened in the last one year or so. One of the issues is that there is uncertainty on the US-India trade deal. So, once I think it's done, that problem will not be there and that's why I said it's a cyclical. Because if you see over time, India's rupee compared to, if you see last five years, the depreciation is not that high. It's only this year that the currency has slipped 6% or so. So, that's why I said it's maybe a question of one year or two years kind of thing. I think the people will come to India. And investments in AI may reduce after some time. So, people will come to India.

What do you think are the reasons for the private sector not stepping up investments?

You need to have growth rate of seven to 8% for that. Right now, we have investment rate of about 30 percent and we need to increase it to around 35 percent. The government has been raising capital expenditure in the last few years to help the private sector. India has been adopting several measures such as GST, ease of compliances and several other steps. This will push the private sector to invest more. Some of the industries said uncertainty is one of the reasons. However, it's the right time to invest because the balance sheets are very good, corporate balance sheets and bank balance sheets, the so called twin balance sheet problem is not there. So, I think this is the right time to invest. But some of the CMIE data shows that there some investments are already happening. So that way, I'm hopeful in the next few years, with these reforms and the government capital expenditure will have multiplier effects on private investment.

Is there a case in the Budget to perhaps look at encouraging consumption through other ways and through other methods?

No, government has already done some of the reforms through GST and income tax that will increase the consumption and similarly, monetary policy also has done reduction in interest rates. So, all those things will lead to consumption pick up in the next six months.

Can you give your perspective on India's declining debt trajectory. Do you think there's room right now for fiscal easing, or should India stick to its fiscal consolidation?

I think, for fiscal easing there is no room. The government will stick to the goals of 4.4 percent fiscal deficit, although it's not a goal. Now, debt-to-GDP is the goal, which is 56.1 percent for this year. For the next financial year, we have to go to 55 percent, that’s how it will be 50 percent (by FY31). That’s the goal, and the government will achieve it.

It’s often said that India needs to grow between 7-8 percent, then only we see a cycle change in per capita income…

Per capita income, generally they say, is between Rs 2,500-3,000. For it to double, about Rs 5,000-5,500 or so. I think generally it takes six years to double the per capita income. But in long term, we need to have 7-8 percent growth, and that depends on several sources of growth.

One is, you know, human capital, skills, education, health, that's the one which we need to focus. Second, is labour intensive manufacturing sector. And third is women participation in workforce. The rates are lower now about 35 percent, world average is 50 percent.

Also, the structural transformation from agriculture to manufacturing and services is needed. Because India has 46 percent of working population in agriculture, which is 15 percent of GDP. So that unless we shift the workers to manufacturing and services with skills, education and other things, then we can't achieve higher growth.

We have been missing our divestment targets? Do you think the government has dropped the idea?

I don't think the government has dropped something because they're trying. I think the government is probably trying to divest IDBI Bank. But the government is waiting for the right time…because the markets and all also have to be, suitable for disinvestment. So probably over time, I think they will try to achieve the targets.

You wrote a piece on PSU IPOs, can you tell us what’s driving the optimism behind?

Earlier, one or two decades back, PSUs faced a lot of losses and Budget had to give protection to them. But now PSUs are having profits. Some may be problematic, but even PSU banks are doing well. So, because of the efficiency improvement in both public enterprises and banks, the people have changed their perception.

Bharat Coking Coal went for IPO. I think, it was subscribed 147 times. And similarly, several other public sector enterprises in recent years have got a lot of subscriptions for IPOs. So, I think lot of efficiency improvement has happened in the sector.

When we look at, where we are from an economic point of view -- the weakening rupee, you said, is not a structural issue, but a lot of people are hurting. So, in this, how does an average Indian feel optimistic about when it comes to the economy, and what is driving your optimism?

As I mentioned, the weakening of the rupee is maybe a concern at individual level, sending people abroad or those things…but from the economy point of view, I don't think one should worry because our inflation is low. When the rupee deficits, inflation increases generally. So that is not a worry.

And then our growth is also good. So that way, from the macro-economic point of view, it's not a problem. That's why I said it's a cyclical, individual level. Of course, one benefits on loses in this kind of thing on the ease of living.

If you see the structural reforms in the last 10 years, I think a lot of things have been done, including IBC and then RERA. So, that has improved certain things. But as I kept on saying, states are also important in this journey. They also have to participate at the ground level, efficiency improvement in this. So, my sense why I'm optimistic about India, because the growth rate is higher, and then we have lot of focus.

We are also paying attention to health, education skills now, which will improve. And then our demographic dividend, which we will have. Because for all the countries, aging is a problem. They're becoming, you know, above 40-50, whereas we still have our median age at 29.