Assessing & delivering bad news on economy no longer taboo in FinMin

Change in mindset has been brought on by Chief Economic Advisor V Anantha Nageswaran who has ensured that discussions on the economy are now much more data-driven and without bluster

Bad news is part of the macro-economic cycle. There will be days when you will have bad news and bad data, be it on GDP, inflation, manufacturing output, consumer and business sentiment, current account and what have you. These are things that can be taken in one's stride. There is no need to react to bad news.

This is the gist of conversations that Chief Economic Advisor V Anantha Nageswaran is said to have had with the Finance Minister Nirmala Sitharaman and senior officials in the Finance Ministry. What this encapsulates is the central theme of Nageswaran’s tenure so far.

Business Standard spoke to a number of Nageswaran’s current colleagues and studied the public interactions and speeches by him and his predecessor. What this reveals is how the assessment of and communication on the economy has become more realistic.

"The discussions on the economy, whether within the government or with institutions, ratings agencies or media, are now much more data-driven and without bluster. This is one trait he has brought in,” said a senior government official.

“Nageswaran will never dismiss any theory or statement, however outlandish one may feel it is. He will examine it against the data available,” said a private sector economist who has worked closely with Nageswaran over the years.

In recent meetings with ratings agencies, before Fitch’s latest outlook upgrade on India, officials led by Nageswaran pushed for a ratings and outlook upgrade and pitched India’s strong domestic economic recovery post the Covid-19 pandemic and efforts made by the centre and the Reserve Bank of India to contain inflationary pressures.

However, government officials were also honest about the weak spots and admitted that global inflationary pressures due to Russia’s invasion of Ukraine have hit household savings and corporate margins, and will impact growth.

At a recent event by the Department of Economic Affairs, Nageswaran emphasised that India is much better placed than other nations in the world to navigate the current global economic and geopolitical challenges.

“This year, we will be facing the challenges of managing a sustainably high growth rate, moderate inflation, keeping the fiscal deficit under balance, and also ensuring that the external value of the Indian rupee remains stable. Naturally there is no pre-programmed roadmap or a menu of options that would help us face these challenges. It has to be adroit and flexible policymaking,” Nageswaran had said.

The change in the signaling on the economy is also clear in the monthly economic reports by the economic division. They are drafted by his colleagues under his guidance.

The Monthly Economic report for May 2022 had cautioned the re-emergence of the twin deficit problem in the economy, with higher commodity prices and rising subsidy burden leading to an increase in both fiscal deficit and current account deficit. It’s also the first time the government explicitly talked about the possibility of fiscal slippage in the current fiscal year.

“As government revenues take a hit following cuts in excise duties on diesel and petrol, upside risk to the budgeted level of gross fiscal deficit has emerged. An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effects of costlier imports, and weaken the value of the rupee, thereby further aggravating external imbalances,” it had said.

It would be prudent to compare this assessment with that of May 2021, published in June of that year, just after the devastating second wave of the Covid-19 pandemic. Krishnamurthy Subramanian was the CEA then.

“As we cautiously recuperate from the second wave, rapid vaccination and frontloading of the fiscal measures planned in the Union Budget hold key to invigorating the investment, and thereby consumption, cycle in the coming quarters. With state-level lockdown restrictions being more adaptive to learnings from the first wave, manufacturing and construction are expected to experience a softer economic shock in the current quarter,” the report had said last year.

Even though the second wave caused a greater impact on the economy than the current geopolitical factors, the tone of the report for May 2021 was much more upbeat than that of May 2022.

Subramanian pegged most of his public interactions on the possibility of a V-Shaped growth after the record economic contraction in April-June FY21, and as late as September 2021 was confident that the economy would expand by double digits in FY22. GDP for fiscal year 2021-22 grew by 8.7 per cent.