RBI Governor Shaktikanta Das recently came down heavily on advanced economies for unilateral policies and the risk it poses for the world. Das advised emerging market economies to follow policies that promote macroeconomic and financial stability, while focusing on growth.
His words, however, do not reflect ground reality. Are we doing enough for macroeconomic stability? The credibility of India's GDP numbers is frequently challenged for 'overestimation' by economists. There are reports of the CAG putting India's fiscal deficit at 6.1 per cent of GDP as against 3.4 per cent, in 2018/19. This includes off-balance sheet borrowings that the government is encouraging PSUs to do in order to meet capital expenditure needs. The higher fiscal deficit would create inflationary pressure. Also, a distorted macro picture influences policy in the wrong direction. The RBI is already, for example, on a rate cutting spree, citing low inflation and lower fiscal deficit. Similarly, the government's plan to raise part of government borrowing abroad to bridge the fiscal deficit comes with huge risk. Former RBI Governor Raghuram Rajan demolished the 'low rates or low cost' theory for sovereign bonds saying that a higher payout at the time of maturity because of currency depreciation would balance the overall cost.
The recent Budget decision on super tax has already led to an outflow of dollars by foreign investors. This could lead to lower forex reserves and put the rupee on a downhill journey. India needs to focus more on attracting capital flows, especially FDI, where there are challenges. It's time to put our own house in order.