RBI pores over budget, worries on fiscal math

Some Reserve Bank of India (RBI) officials are worried that a populist budget could put the onus of driving growth on them but limit their ability to respond through big rate cuts this year.

Finance Minister Arun Jaitley increased spending on farm and social sectors in the 2016-17 fiscal year on Monday in a boost to rural India, where most of the country's 1.3 billion people live.

He curbed capital expenditure growth compared to the previous year, yet stuck to his commitment to reduce the fiscal deficit to 3.5 percent of gross domestic product.

Three policymakers aware of the central bank's deliberations on the budget said they are combing through the numbers to test how Jaitley struck a balance, and question some of the assumptions.

An expected $16.6 billion salary and pensions hike for government employees, for example, is inflationary and hasn't been fully accounted for in the budget, they said.

Also, they said the government's revenue expectation from asset sales appeared optimistic given that these fell nearly two-thirds short of the target in 2015-16.

Additional expenses on salaries and a shortfall in receipts could force the government to cut back on capital expenditure to meet its fiscal deficit target. That would hit growth and increase pressure on the RBI to do more, the officials said. "If private investment doesn't pick up, the burden on monetary policy to boost growth will increase," one of them said. A finance ministry official said the impact of higher salaries on inflation will be marginal.

On Thursday, Junior Finance Minister Jayant Sinha acknowledged that a tight fiscal policy will help in further monetary policy easing.

"If we don't provide that (macroeconomic stability) space to monetary policy by generally running a relatively tighter fiscal policy, we cannot expect monetary policy to loosen up as a result of that," Sinha said at an event.

Read More

Fiscal deficit at 88% of annual target

The government’s fiscal deficit for the first nine months (April-December) of this financial year stood at 88 per cent of the annual target comparable with 100.2 per cent of the target it managed during the same period in the previous financial year.

The April-December fiscal deficit — the difference between government revenue and expenditure — stood at Rs.4.88 lakh crore, which is 88 per cent of the Rs.5.55 lakh crore target for the full year set by Finance Minister Arun Jaitley in the Budget. It amounts to 3.9 per cent of the GDP, a target that many industry leaders want to be pushed back in favour of increased public expenditure. They said it will boost domestic demand.

Several economists argue that it is important to stick to the fiscal deficit target since government accounts already fail to show the correct picture.

“The government has Rs.70,000 crore of unpaid bills to the Food Corporation of India due to the food subsidy, and a similar amount of unpaid bills due to the fertiliser subsidy that haven’t been shown in the Budget. This omission makes the fiscal deficit number look better than it is. It is important that the government sticks to the fiscal deficit target because the real number is likely higher than what is being shown,” Ashok Gulati, Infosys Chair Professor at the Indian Council for Research on International Economic Relations told The Hindu.

The other argument is that the government must simultaneously increase public spending and still keep a tight grip on the fiscal deficit target since it is availing the benefit from falling oil and mineral prices.

“The government must stick to the fiscal deficit target. Government expenditure has to also be increased, but the government has to come up with innovative ways to finance this.

“One way is to revive PPPs, and the Kelkar Committee report laid out a good roadmap for this. Another way is to bring to resolution the large number of tax dispute cases held up in court, which will then release the tax arrears,” said M. Govinda Rao, Professor Emeritus at the National Institute of Public Finance and Policy.

The third option is to make use of the huge saving the government is incurring due to falling oil prices. Mr. Jaitley on Friday told the Press Trust of India that the savings from oil prices will be pumped into infrastructure.

Read More