Questioning the need for and effectiveness of a fiscal stimulus to Indian industry, Chief Economic Advisor (CEA) KV Subramanian called any such potential step a “moral hazard” and an “anathema” to the market economy.
The CEA was speaking at an event in Delhi moderated by CNBC-TV18’s Shereen Bhan. The comments come at a time when several business leaders from auto, real estate, FMCG & others have been asking for Government intervention to prop up flagging demand.
Referring specifically to the auto sector, Subramanian said "Since 1991 we are a market economy, and in a market economy there are sectors which go on sunrise and then go through sunset phase."
"If we basically expect the government to use taxpayers' money to intervene every time when there are some 'sunsets,' then I think you introduce possible moral hazards from 'too big to fail' and as well as the possibility of a situation where profits are private and losses are socialised which is basically an anathema to way the market economy functions."
He was referring to the upcoming deadline in April, 2020 for auto manufacturers to shift to the low-carbon emitting BS-6 vehicles and sale of current BS-4 vehicles will come to an end.
“There is disruption that is coming in various forms be it the Ola, Uber phenomenon, be it the fact that today for the younger generation a car is not necessarily a status symbol to that you also add the disruption that is coming from electric vehicles, none of these necessarily have to do with economy. So we have to be careful to say that what is happening with the auto sector is necessarily symptomatic of the economy,” said CEA Subramanian
He also argued that Indian economy is in the midst of shedding some bad habits and it cannot happen in an instant
“If we look at it from the 2009 to 2014 period and not just that period, but I think that was sort of a culmination of some habits that had crept up which is basically one of which was very meagre equity in the corporations, use of features like borrowing debt in the subsidiaries, putting it as equities in parents, putting up shares as collateral, so there is effectively the extent of equity in the system and just the way business was getting done, I think there were bad habits that actually had not only crept in but had actually got accentuated. So this ramp up in the corporate leverage in capacity which happened over all most 6-8 year period the unwinding of that cannot happen in instant. So we are still sort of undergoing the overhang of that, but what I look at it as a very important point is that we are in the process of trying to actually reduce and eliminate some of these bad habits,” said the CEA.
Power Secretary Subhash Chandra Garg was also part of the panel discussion with CEA Subramanian. He also discouraged talks of a fiscal stimulus and argued that interest rate reduction and access to easier credit are better tools to get the economy back on the high growth path.
Garg, who was the finance secretary till last month, said the first quarter growth numbers are likely to be lower than the same quarter last fiscal due to general elections impact on the economic activity.
“The first quarter number is likely to come on August 31. It might come around 5.5 to 6 percent. People might treat it as another evidence of a big slowdown. Actually it is not, he said.
"I think the sentiment will change, we need to take a very careful decision. Is the fiscal stimulus based on additional borrowing in the market and cutting down the excess to the private sector of the fund?... We have a problem with the rate mechanism. If we further borrow, the rate transmission will not take place efficiently. What works better is faster transmission of rate reduction and availability of credit to private sector is a better way rather than a stimulus," Garg said.Government sources have told CNBC-TV18 that they are wary of any big bang stimulus and would instead adopt a calibrated approach to boost demand.