Why lower fiscal deficit isn’t always good news

  1. According to the data,there is growing concern about the slowdown in India’s economic growth.Recently,RBI had also cut repo rates by 35 basis points, which was the sharpest cut in nine years.
  2. In macroeconomy,there are two components.One is the structural or the permanent component which is largely determined in the long term by factors such as institutions, productivity,human capital among others.
  3. The second is a cyclical or temporary component which refers to short-term fluctuations.
  4. In India,both the components seem to be in a slowdown phase and the projection is that it will slow down further.If the slowdown was there,the government should have gone for a countercyclical measure at least to address the short-term fluctuation.
  5. Further,there are two major policy instruments which is the fiscal policy and the other is monetary (interest rate) policy. 
  6. In a cyclical downturn,it is the fiscal policy that should have been ahead, followed by the monetary policy.But the government did the opposite to such an extent that monetary policy appears to be fighting a lonely battle.
  7. However,the government can take several steps to address the economic slowdown,Firstly,it should increase household savings.Given the declining deposit rates,the banking system is actually recovering its losses at the cost of household savings.
  8. Secondly,the government needs to correct a structural policy misstep introduced by the Finance Bill of 2018.The Bill did away with targeting revenue deficit and compromised on the public capital expenditure.
  9. Lastly,the government needs to quickly recapitalise public sector banks (PSBs).There could be resistance for this but unlike private banks,public sector banks have large social obligations.