Opinion India needs to bring down its fiscal deficit which is highest among G20 countries

The best way to proceed is to set up a high level committee of credible professionals to look into this and suggest ways and means to bring in frugality and efficiency in public expenditures of the Centre and the states, making it more growth oriented, creating more jobs and livelihoods, and more environment protecting.

Union Finance Minister Nirmala Sitharaman, in one of the conferences recently organised by ICRIER, had remarked that managing inflation with growth has to be done in a synchronised manner by the RBI, the Ministry of Finance, the Ministry of Food, and many other ministries. (Illustration: CR Sasikumar)

Ashok Gulati

Manish K Prasad

December 12, 2022 02:34 PM IST First published on: Dec 12, 2022 at 07:53 AM IST

As India takes over the G20 presidency, one of the big jobs under the finance track is to ensure that G20 nations come up with a credible policy framework to tame inflation, especially food inflation, while protecting growth and ensuring overall financial stability. The massive stimulus that was injected in almost all G20 nations to circumvent the fear of recession during Covid-19 has come back to haunt them in the form of excess liquidity, causing inflation. On top of that, the Russia-Ukraine conflict has flared fuel and food prices while climate change in the form of intense heat waves, floods and droughts, is also hitting at food prices in several countries. The central bankers of the G20 have been on the job, using monetary policy tools to douse inflation pressures. But the job is not yet over. The year 2023 will be a test case for the collective wisdom of the G20 in taming inflation and protecting growth.

In Turkey, food inflation is surging at 103 per cent. Argentina’s food inflation is at 91.6 per cent. One wonders how they are controlling social unrest in their countries as the life-long savings of people are being eroded. Even in Germany, food inflation is at 17.7 per cent – an unprecedented phenomenon in decades. India is in a much better position with 7 per cent food inflation. The RBI governor has recently pronounced that the worst of inflation is behind us. Perhaps it is time to appreciate the RBI’s policy in managing inflation. The beauty is that India is taming inflation while scoring the highest GDP growth (6.1 per cent in 2023), as forecasted by the IMF’s World Economic Outlook. In terms of GDP growth, China is likely to be at 4.4 per cent, the US at 1 per cent, the Eurozone at 0.5 per cent and the UK at just 0.3 per cent (see Infographics).

India is taming inflation while scoring the highest GDP growth (6.1 per cent in 2023), as forecasted by the IMF’s World Economic Outlook.

Incidentally, global growth is likely to tumble from 6 per cent in 2021 to just 3.2 per cent in 2022 and 2.7 per cent in 2023. Advanced economies are likely to see even lower growth at only 2.4 per cent and 1.1 per cent in 2022 and 2023 respectively. Similarly, China’s growth has been downgraded to 3.2 per cent in 2022 (the lowest growth in more than four decades, excluding the initial Covid crisis in 2020), and a tad higher to 4.4 per cent in 2023.

Against this global backdrop of inflation and growth, India can surely stand tall and may be able to give a lesson or two to the G20 on how it has managed not to let food inflation go out of control and yet maintained the highest rate of GDP growth.

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In this context, it may be noted that food inflation has been hurting not just the G20 economies, but also several African nations where the purchasing power of people is very low. If India is to represent an agenda for the Global South, one thing it must do is to invite the African Union to the G20. African nations are suffering badly from food inflation for no fault of theirs and need support from the G20.

Interestingly, Union Finance Minister Nirmala Sitharaman, in one of the conferences recently organised by ICRIER, had remarked that managing inflation with growth has to be done in a synchronised manner by the RBI, the Ministry of Finance, the Ministry of Food, and many other ministries. It is like playing an orchestra with various policy tools to create a symphony. It can’t be done just by the central bank alone. This is an important lesson that India can offer to G20 nations. But which policy instrument to play at what time, and at what volume, is an art making that needs to be fleshed out clearly for others to follow.

However, there is no room for complacency even for India as we step into 2023. While our GDP growth prospects are the brightest and inflation is under control (though still not below the upper tolerance band of the RBI), our fiscal deficit at 9.9 per cent (Centre and states combined) is the highest amongst all G20 countries. That’s not a good sign of sound macroeconomic management. The Fiscal Responsibility and Budget Management Act of 2003 (FRBMA), which was passed by Parliament when Atal Bihari Vajpayee was the Prime Minister, had envisioned bringing down the fiscal deficit to 3 per cent of GDP. That has remained a tall order for almost all governments since 2003. If Sitharaman can bring down the fiscal deficit of the Centre in a calibrated manner somewhere between 3 to 4 per cent in the next year or two, without jeopardising growth, that would be the real feather in India’s cap for macro-economic management. It is not impossible, and can be done if efficiency in public expenditure is kept at a high priority.

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The Prime Minister has been recently talking of staying away from the revdi (doles) culture during the state assembly elections. The issue has also attracted the attention of the Election Commission as well as the Supreme Court. Earlier, the Finance Commission under the chairmanship of N K Singh had red flagged the growing culture of subsidies at the Centre and states. The time has come to bite the bullet on this. No one can deny the need for targeted subsidies to the most vulnerable. But the dole culture has gone far beyond that welfare objective to almost using it as a bait to win elections. It is this “bribe for votes” that needs to be tamed. The best way to proceed is to set up a high level committee of credible professionals to look into this and suggest ways and means to bring in frugality and efficiency in public expenditures of the Centre and the states, making it more growth oriented, creating more jobs and livelihoods, and more environment protecting.

If India can do that in a professional and pragmatic manner, it can surely lead the G20 to a much more sustainable finance track.

Gulati is Distinguished Professor and Prasad is a researcher at ICRIER