RBI chief Rajan warns against fiscal deficit driven growth

Ahead of the Budget, RBI Governor Raghuram Rajan on Friday warned against generating economic growth through additional debt saying that any deviation from the fiscal consolidation path will hurt stability of the economy.

Rajan said that macroeconomic stability during the global turmoil cannot be risked and the government and RBI should continue to bring down inflation.

"As Brazil's experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. We should be very careful about jeopardising our single most important strength during this period of global turmoil - macroeconomic stability," he said here.

Delivering the CD Deshmukh Memorial lecture, Rajan said there is a public discussion whether India should yet again postpone fiscal consolidation path with some arguing that it could lead to higher growth.

"Unfortunately, the growth multipliers on government spending at this juncture are likely to be much smaller, so more spending will probably hurt debt dynamics. Put differently, it is worth asking if there really are very high-return investments that we are foregoing by staying on the consolidation path?" he said.

Rajan said that consolidated fiscal deficit of the Centre and states rose to 7.2 per cent in 2015 from 7 per cent in the previous year.

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"So we actually expanded the aggregate deficit in the last calendar year. With UDAY, the scheme to revive state power distribution companies, coming into operation in the next fiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on the centre to adjust more," he said.

The NDA government had last year deviated from the fiscal consolidation path, postponing reduction in fiscal deficit target by a year.

Originally, the target was to bring down fiscal deficit to 3.6 per cent of the GDP in 2015-16 but it has been postponed by a year. Now, government is targeting 3.9 per cent in the current fiscal.