‘India on course for 11% growth this fiscal, to meet deficit goal’

CEA says capex will boost construction, but warns of ‘irrational exuberance’

Playing down concerns about high inflation and rising commodity prices, Chief Economic Adviser (CEA) Krishnamurthy Subramanian said on Monday that India was on course to grow at about 11% and meet the fiscal deficit target of 6.8% of gross domestic product this year.

Asserting that the Union Budget’s plan to scale up capital spending by 35% in FY22 would boost construction activity and create jobs in the informal sector, Mr. Subramanian said this would boost demand and enable the country to get growth without high inflation.

“I don’t foresee a problem at all in meeting those estimates for infrastructure spending,” the CEA said in an interaction with the Indian Construction Equipment Manufacturers Association, before warning them against a potential risk of ‘irrational exuberance’ over the coming few years.

“We should not repeat the mistakes of bank-led infra funding which led to this entire bad assets’ problem. The main lesson for all of you should be not to repeat the mistakes we had after the global financial crisis,” he said, asserting that a limited focus on revenue expenditure after the 2008 crisis had led to runaway inflation. “There will be a period 2-2.5 years later where there is a possibility of irrational exuberance coming in. I think industry will have to be careful about not saying we will always have 12%-13% growth. The seeds for a crisis are always sown in good times. If we keep that in mind, we can ensure that the growth is a sustained one and not one where you slam down on the accelerator only to realise that now you have to push down the brakes,” he explained.

Inflation, he contended, was a ‘touch higher’ due to temporary supply-side effects from recent economic restrictions. “I don’t anticipate inflation to be a problem when you create growth by working on the supply side,” he said, arguing that India’s failure to undertake supply-side reforms after the 2008 crisis led to a triple whammy of high fiscal and current account deficits with runaway inflation.

“When you have the supply side pushing it, monetary and fiscal policy is working together rather than at cross purposes, which is what happened after the financial crisis. Because when you have high inflation, monetary policy has to undo the demand push that has been given by fiscal policy. Growth should happen without runaway inflation,” he concluded.

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