Slowdown Challenge

The slowdown of the economy is severe in the consumer-facing sections. It has also affected the industrial sector as cumulative demand in the economy has slowed down. Price signals like wage data and inflation have reinforced the picture of a slowing economy.

The current situation for global demand continues to be bleak and private investments remains anaemic and hence the burden for reviving India's growth engine lies in the hands of the government.

Credibility Challenge

The next biggest challenge is to restore the credibility and sanctity of the budget numbers. The country's fiscal consolidation over the last few years has indeed hidden the heavy - duty off-budget financing by the Union government with a sole intention to keep the fiscal deficit numbers look good.

The move has strained the credibility of the country's fiscal metrics and has made analysts worry of below - the - line borrowing by the government. The government's accounting methods have also come under attack from the Comptroller and Auditor General of India (CAG).

The issue was raised in the previous monetary policy committee (MPC) meet of the Reserve Bank of India (RBI) which was held during the first week of June. The minutes of the meet shows that both Chetan Ghate (an independent MPC member) and Viral Acharya (former RBI Deputy Governor) has raised concerns about burgeoning public borrowing and how this was not accounted properly in the budget.

Ghate stated, according to the minutes that the "Fiscal prestidigitation or sleight of hand may contribute to our own version of a "doom-loop" that is by pushing expenditure off budget to meet deficit targets and then recourse to borrowing from the national small savings fund by the state entities which keeps administrative interest rates high to incentivise such savings". He also added that "this impedes monetary transmission. Poor monetary transmission requires a more active fiscal policy to compensate which breaches fiscal targets once again".

Acharya also pointed out that when public sector borrowing requirements are taken into account, the country's fiscal deficit stands between 8 - 9 per cent of GDP according to him, has reached levels similar to the ‘taper tantrum' of fiscal 2013. He warned that in case of another such global shock, India could be hit badly once again.

The best way to overcome this challenge is proactive disclosure. By reporting all the borrowing items transparently, the finance ministry may end up revising the fiscal deficit numbers upwards. This option is better to implement now when fund flows favor India than when India is hit by outflows.

Statistical Challenge

The Gross Domestic Product (GDP) numbers actually act as the key universal denominator for all the fiscal - related metrics and projections and including that of the decision making by investors, policy makers and multilateral institutions depend on them as it is important to produce reliable GDP numbers. For policy making to be effective, it is very necessary that the real-time GDP numbers which are the advance estimates provide a reliable idea of the state of the economy.

The country's GDP data is repeatedly questioned from all quarters including that from the analysts and independent economists on timeliness and accuracy. The revised estimates of the Former Chief Economic Adviser to the Finance Ministry - Arvind Subramanian may or may not be nearer to reality. But the fact remains that a top economic adviser had to design economic policies without the aid of an accurate barometer of the economy.

For the economic policies to be based on evidence and for those policies to enjoy support from the stakeholders in the economy, it is inescapable to restore the credibility of the GDP numbers.

A noted Economist V Anantha Nageswaran states that "Instead of arguing about it (GDP numbers), it is far easier and more effective (lasting effect) to make available the Central Statistics Office (CSO) data and methodology to independent statisticians for verification, only then will the controversy end."

The Finance Minister can do her bit by asking officials of the Ministry of Corporate Affairs (MCA) which she currently heads, to put up the MCA - 21 data in the public domain in a machine-readable form so that independent researchers can examine the data, putting an end to all the baseless allegations.

This will go in a long way in building confidence about the new GDP series which heavily relies on the MCA - 21 database and also help point to improvements that may be needed in the way this database is used for calculating the country's GDP figures. This also helps to boost the investor's confidence in India's growth story and alleviate fears that India may be mimicking its neighbour - China and exaggerating numbers.