The government should continue to move ahead on the path of fiscal consolidation slowly and not abandon it, as the demonetisation shock will only last for one - two quarters, a top JP Morgan economist said on Monday.
"It's a delicate balancing act.
India needs to protect its macro - economic stability.
We are now a safe haven among emerging markets because our inflation has come down, reforms have started.
We don't want to reverse the hard - earned credibility, " Sajjid Chinoy, chief India economist at JP Morgan told BTVi in an interview.
"If initial deficit was at 3. 5 per cent, the deficit this year (2017) could be 3. 3 per cent this year and 3. 1 per cent next year (2018).
Chipping off the deficit, is what we want.
Debt to GDP ratio has been coming down, " Chinoy said.
He said that the year 2017 is likely to see more protectionism from advanced economies.
"Monetary conditions have tightened and there are higher interest rates in other economies.
There are larger deficits in the world.
It is on my wishlist that we get more public investment so that more fiscal space opens up, " he said.
Chinoy said that the growth shock has been because it was taking more time to remonetise economy.
"In a few months, there should be enough cash in economy.
It's a short one - two quarter economy shock. "
Though there is a lot of clamour among industry participants who are saying that demonetisation needs to be countered with a large consumption stimulus.
"My sense is that consumption is rebounding because people have cash in their pockets.
I would expect economic activity to rebound in the second half of 2017.
Why do we need entire fiscal deficit to be relaxed for 17 - 18?"
he said.
"We already have a stimulus on the monetary policy front.
All over the world, interest rates have increased sharply, but in India the rates have come down.
Lending rates have collapesd because banks are flush with money.
Aboout 20 - 25 per cent of the deposits will stay with bank permanently, " he added.
Chinoy said that there should not be over - stimulation of the economy with too much relaxation on the deficit.
In India, consumption is not a problem but investment needs a push and the Union budget needs to focus on the public investment.
"It's important that the Budget focuses on public investment, that has deficit.
There is gap that can be filled if we double the public investment.
We need more of roads, railways, highways and airports, " he said.
On the growth front, he said that JP Morgan has cut down the growth forecast to 6. 7 per cent this fiscal but expects it to go up to 7. 2 per cent in 2017 - 18.
"Before demonetisation, our forecast was 7. 2 per cent for 2016 - 17.
We have marked it down to 6. 7 per cent for this fiscal.
We still expect GDP growth to revert to 7. 2 per cent in 2017 - 18 as our assumption is that this a 2 - 3 quarter liquidity shock, " he added.
The economist said that demonetisation will push the informal economy towards the formal economy but the challenge will be for the firms to remain competitive.
"One of the benefits is the push to formal economy.
Tax base should widen.
But once we force the firms to enter formal economy, they may become unviable when they start paying taxes, " he cautioned.
Chinoy said that we should be mindful that if the informal industry becomes unviable, it should not be replaced by cheap Chinese imports.
However, he said that labour market reforms and banking reforms, will enable such firms to join formal economy and still remain competitive.
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