Clever strategy needed to exit expansionary policies for fiscal consolidation: Finance Commission member

Member of the 15th Finance Commission Ashok Lahiri on Tuesday said the government should have a clear strategy to exit expansionary policies aimed at boosting demand and supply in the economy to succeed in fiscal consolidation.

He also cautioned about monetary policy and said banks should monitor end-use of all loans which are 100 per cent guaranteed by the government.

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"... Clever policies should have to have a clear exit strategy. We have said enough time that we will consolidate, we will unravel expansionary policies. But we have not succeeded so much in delivering on the promise," Lahiri said at the CII-annual general meeting here.

In the 2019-20 fiscal, the government had budgeted fiscal deficit to come in at 3.3 per cent of GDP and revised it upwards to 3.8 per cent in the revised estimates (RE). The actual fiscal deficit, which is the difference between government expenditure and revenue, overshot the RE and came in at 4.59 per cent.

Lahiri said this is the time to think of policies which help boost both supply and demand and spend more on infrastructure to make sure money is not wasted.

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"I will be careful about monetary policy. All the loans which are 100 per cent guaranteed by the government, banks must have have a skin in the game and they have to monitor the end use," Lahiri added.

Stating that GDP fell in nominal terms only in three years 1952-53, 1953-54 and 1970-71, he said the nominal GDP growth rate in current fiscal would be between 2-6 per cent, lower than 7.2 per cent in 2019-20.

National Institute of Public Finance and Policy (NIPFP) Director Rathin Roy said even if we are able to restart manufacturing and services, they will need demand for them.

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"What you see in the packages announced is measures to get relief and measures to allow people to dip into their savings to consume more. I don't think these measures are going to be very effective in boosting aggregate demand," he said.

"If consumers stop buying things, demand will be inadequate and growth will be in negative territory, I think close to 5 per cent negative ....I will be happy if I see a nominal growth rate of zero this years and a positive nominal growth rate next year... Anything less than 5 per cent (real GDP growth) this year will imply structural weakness and therefor getting back into reasonably positive territory next year will be very difficult," Roy said.