Tuesday, March 8, 2011

'Fiscal adjustment has to be the priority'

Arvind Virmani, the country’s Executive Director at the International Monetary Fund, says use of fiscal policy to help contain inflation was an important issue in the Budget and the finance ministry appreciated that. Edited excerpts from an interview with Vrishti Beniwal:

Did the Budget address the key concerns?
In a global context, there are two things standing out about India, inflation and fiscal deficit. Inflation is important from the domestic and global angle. To a certain extent, things were being tried but not working. So, you needed bigger tools. The important thing in the Budget was an implicit recognition that tighter fiscal control at this point would be good for overall macroeconomic control of inflation. That would allow you greater flexibility on monetary policy, especially given the large capital inflows into emerging markets across the world. It would be appreciated in global circles that room has been made for that in fiscal deficit reduction

The fiscal deficit target has been lowered from 4.8 per cent to 4.6 per cent next year. Some economists are sceptical. Is it achievable?
There is a good chance it will be achieved. My basis for saying so is that they are quite clear fiscal consolidation is important for macroeconomic balance, particularly inflation. Given that, I’d be willing to bet they’ll achieve the target, unless there is a shock of a completely different kind.

At the IMF, how did they look at India’s macroeconomic situation and handling of the issues?
The international perspective has been that the fiscal issue is important for India’s economy. Before the previous Article IV, there was a lot of interest on what would happen to the fiscal deficit. In fact, we have argued very strongly against their judgment that temporary expenditures and temporary revenues were matching and there would be an adjustment in the Budget. So, in that sense, it makes my job also much easier and we can say that four months ago, what we said was right. What you are seeing is three per cent increase, but if you take away the temporary measures, it would be a reasonable increase. Part of the expenditure was from higher revenues from non-tax sources such as telecom spectrum revenue. If you remove those expenditures, the growth between two Budget Estimates is in the normal range.

What should be the monetary policy stance in the current situation?
The quicker and stronger the fiscal adjustment is once the growth is back to the higher level, the easier it is for monetary policy to address issues like capital flows and agricultural shortfalls. It would make it even easier to control inflation if fiscal consolidation proceeds rapidly over the next few years.

The Economic Survey has favoured banking licences for industrial houses. What are your views?
This has been discussed for a long time. It’s a very difficult issue and that’s why no decision has been taken. The important lesson from the global situation is that you have to be very careful with the regulatory systems. One assumes the RBI now feels confident enough of the regulatory aspects to let this happen. As long as it is regulated properly, the more the competition, the better it is. However, we also know that in a sensitive sector like banking and finance, without regulation you can get all kinds of malpractices when banks compete too strongly, on the assumption that they will eventually be bailed out by the government. So, risk-taking can be very high.

When are quota reforms at IMF coming into force?
It’s a matter of time. The vote has been completed on the second one. The Fund administration was hopeful that it would be completed by end of March. We are already at the beginning of March. I hope they are able to get to it. The next one has to be completed by, hopefully, the end of the year.

No comments:

Post a Comment

Subscribe to Extraminds feeds

NDTV News - Top Stories

There was an error in this gadget

Latest Happenings all around the world Headline Animator