Fiscal deficit worries could be on backburner: Niti Aayog's Rajiv Kumar

India should not let fiscal deficit worries stop it from spending more to fight the Covid-19 crisis, an adviser to Prime Minister Narendra Modi said.

“If you have to spend money because you have to save both lives and livelihoods then that’s what you have to do,” Rajiv Kumar, vice chairman of the federal government’s think-tank Niti Aayog, said in an interview. “Issues about fiscal space could be on the backburner.”

There is a high probability of a third wave of coronavirus infections in India given what has been seen in most other countries, Kumar said, by way of supporting his prescription to overlook fiscal considerations until the pandemic is curbed.

The International Monetary Fund too is of the view that nations should continue to spend to support health-care systems and households until Covid-19 spread is controlled globally and the economic recovery strengthens. While India’s budget gap more than doubled to 9.3% of gross domestic product in the year ended March as it spent more to cushion its economy against the pandemic, it aims to narrow the deficit to 6.8% of GDP this year.

That’s because excessive borrowing could fuel inflation and crowd out private investment. At least one of those concerns is overdone, according to Kumar.

“The direct relation that people have talked about between fiscal expansion and inflation doesn’t really hold,” Kumar said, pointing to price-growth remaining mostly within the central bank’s targeted 2%-6% range this year. The recent spike in prices is temporary and “inflationary expectations remain anchored.”

Data Monday showed inflation came in at a softer-than-expected 6.26% in June, although it was well above the Reserve Bank of India’s upper tolerance limit for a second straight month. Governor Shaktikanta Das last week said growth is the main challenge now and that inflation, while sticky, was only “a transitory hump.”