How India's battered economy can be revived

World Bank chief economist Kaushik Basu wants liquidity infusion on the fiscal side to boost economic growth for nine months or so.

Step up spending for a while, says former chief economic adviser, and let market determine exchange rate World Bank chief economist Kaushik Basu, who used to advise the finance ministry on major economic issues from mid-2009 to mid-2012, says it needs to loosen a bit on the fiscal side to propel economic growth.

The Keynesian advice comes after Finance Minister P Chidambaram has said he considers the fiscal deficit at 4.8 per cent of gross domestic product in 2013-14 as a ‘red line’.

“I know these are fiscal consolidation times. But we should not compress expenditure,” Basu, also vice-president for development economics at the World Bank, said while delivering the JRD Tata Memorial Lecture, organised here on Monday by the Associated Chambers of Commerce and Industry.

Basu wants liquidity infusion on the fiscal side to boost economic growth for nine months or so.

The finance minister had resorted to a heavy cut in plan expenditure in 2012-13 to peg the Centre's fiscal deficit to 5.2 per cent in the revised estimate, against 5.1 per cent in the Budget presented a year before, while the expectations were that it would cross 5.5 per cent.

At the end, the government was able to cut fiscal deficit to 4.9 per cent of gross domestic product for 2012-13.

On the Reserve Bank’s monetary policy, Basu said liquidity infusion was a tricky issue, since the rupee had been depreciating against the dollar.

However, RBI should have been a bit innovative and used its tools in a different manner. “What RBI has done is to use the standard tools, that is to sell dollars,” he said.

For example, the central bank can say that a particular amount of forex reserves is not to be used for stabilising the rupee, which could have given a signal to the markets, the former chief economic adviser said.

He said the central bank’s role is to intervene strategically and the rupee value in general should be left to market forces.

“We used to crib when the Chinese currency was depreciated, saying it had an advantage. We are cribbing now as well. Exchange rates should not be treated as some kind of machismo.”

Amid differences between the RBI governor and the finance minister, Basu commended the former, D Subbarao, for upholding the dignity and autonomy of the central bank.

He, however, refused to be drawn into a controversy on the debate between the two.