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Govt should prefer growth to fiscal consolidation: Former RBI Governor C Rangarajan

Govt should prefer growth to fiscal consolidation: Former RBI Governor C Rangarajan

NEW DELHI: Former central bank governor C Rangarajan has said the government should prioritise growth over fiscal consolidation in the upcoming budget and accept an elevated deficit to restore the economy to FY20 levels.

“I think that a growth rate of 8-9% is absolutely essential in 2021-22 and that should be the guiding principle for the budget,” Rangarajan told ET about measures needed in the budget to put the pandemic-battered economy back on the growth path.

Rangarajan pegged the fiscal deficit for the current year at 6-7% of gross domestic product against the government’s target of 3.5%, adding that it would have to be maintained in FY22 as well, with a fresh fiscal consolidation roadmap.

“My estimate is that the decline during FY21 will be 8%. Therefore, if you have to compensate for it, growth has to be a little more than 8% because you’re coming from a lower base,” Rangarajan said.


Government expenditure will be critical in the coming year and should be maintained at FY21 budgeted levels, at the very least, Rangarajan said.

“It appears that the government has not been pushing expenditure very much. The sub-sector, which we call public administration, defence and other services, was negative,” he said, citing official second-quarter figures that showed a 12.2% fall in the sub-sector.

The spending push will have to be financed through a mix of borrowing, strategic privatisation and monetisation of assets, given that the Centre’s tax revenue is likely to remain muted, according to M Govinda Rao, former member of the Prime Minister’s Economic Advisory Council chaired by Rangarajan.

Rangarajan called for an emphasis on capital expenditure, stating, “A clear indication of the total capital expenditure by the government and public sector enterprises should be presented in the budget.”

No further concessions should be provided in terms of corporate tax because those that were given as part of the pandemic relief and earlier would take effect in FY22, according to Rangarajan.

“Concessions on corporate tax rates make sense only when investments are being made, which has not happened this year,” he said. “Perhaps with more stabilisation going forward, it can happen and therefore, I would not suggest any further concessions in that area.”

In September 2019, finance minister Nirmala Sitharaman slashed the corporate tax rate for domestic companies to 22% in a bid to improve private investment in the economy.

Rao pushed for higher expenditure by the government to compensate for the likelihood of a continued weakness in consumption and investment.

“It should, however, lay the road map for the fiscal consolidation process from 2022-23,” Rao added.

On Thursday, the government’s preliminary estimate showed a 7.7% contraction in GDP in FY21. Rating companies and institutions have projected the country’s growth at 8-12% in FY22.

Banking Sector
According to Rao, the time was also ripe for urgent reforms in the banking sector amid stability concerns.

“This is the time to reform the public sector banks by creating a bank investment company in the budget and transfer the government’s stake in public sector banks to the company,” Rao said, adding that this would relieve the Centre of the burden of recapitalisation.

( Originally published on Jan 10, 2021 )

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