India’s Fiscal Position Leaves Less Headroom For Stimulus, Says YV Reddy 

India’s fiscal position leaves less room for a stimulus even as domestic growth slows, according to YV Reddy.

“The true fiscal deficit in the current year is more than perhaps that in the past,” Reddy, former governor of the Reserve Bank of India, said at a conference organised by the National Council of Applied Economic Research. “Basically, there is some fudgeting. But if the degree of fudgeting is more, then there is a distance between the true fiscal deficit and the real fiscal deficit. That is one issue.”

Reddy pointed out that this fiscal deficit is only sustainable with the “continuation of financial repression, the monetisation of the deficit by the RBI, and the non-residents holding more government paper than before - FIIs in particular”.

A fiscal stimulus should be assessed keeping in mind the medium-term fiscal consolidation path and also that public sector borrowings seem to be larger than before. “If we agree that fiscal consolidation is required, then we have to recognise that the headroom is less, immediately, unless they have some special strategies.”

He underscored the challenges from global situations like the fear of recession, the trade war between the U.S. and China, and the conflict in the Middle East impacting oil prices and capital force. The advantage for India, according him, is the political stability, which improves the government’s capacity to handle shocks. “This should give us lots of confidence.”

Reddy said while the slowdown in the domestic economy has been admitted, it’s still not clear if it’s cyclical or structural. Perhaps, it’s a mix of both, he said.

And given the global uncertainty, de-risking should be the short-term objective and the long-term strategy to manage the external factors, according to Reddy. The priority in reforms, he said, should be given to enhance savings, improve productivity and ensure conducive investments.

Watch the full speech here: