In a marked contrast from the adversarial stance adopted by the previous UPA government, Finance Minister Arun Jaitley and Reserve Bank of India (RBI) Governor Raghuram Rajan have agreed on an acceptable path of inflation targeting, with the central bank taking the lead role.
The agreement on Sunday puts behind a frosty relationship that had emerged between the RBI and the Finance Ministry, as witnessed over the past few quarters. Jaitley, after a meeting of the RBI’s central board here on Sunday, clearly indicated that though the policy regime must be tuned to boosting economic growth, the final call on a rate rejig has to be with the RBI.
“I, on the same evening (as the monetary policies of June 3 and August 5) issued a clear statement and I think that’s very clear. This is an issue that the RBI decides and I am sure they factor in various circumstances,” Jaitley told reporters after the meeting.
The RBI has kept key rates unchanged in successive monetary policies as it continues to try to put a lid on runaway inflation. In its third bi-monthly monetary policy on August 5, Rajan had stressed that the RBI must “remain vigilant” on retail inflation and its next goal was to bring inflation down to 6 per cent by January 2016.
At the time, Jaitley had said inflation was moderating and the government was committed to fiscal consolidation and reviving the investment cycle. “Going forward, the RBI should examine the liquidity situation, inflation and growth in setting policy rates,” he had said in his Facebook post.
Retail inflation in June had eased to 7.31 per cent from 8.28 per cent a month ago while wholesale prices rose 5.43 per cent in June. But concerns of a weak monsoon stoking inflationary pressures persist and the larger target of 6 per cent retail inflation by January 2016 is being seen as extremely challenging.
“The Finance Minister indicated that the policy regime is being geared towards attaining higher growth, lower inflation and sustainable external balance in the backdrop of macro-economic challenges faced in the last two years of sub-five per cent growth and high inflation,” said an official statement on Jaitley’s address to the RBI’s central board.
After the meeting, Rajan said the monetary policy that is focussed on containing retail inflation is on target. “We (our policy measures) are contingent on the data coming in,” he told reporters, adding that the RBI is also working on a new monetary policy framework with the Finance Ministry.
An official present at the meeting said Jaitley confined himself to giving a presentation on his Budget and did not offer advice on the suggested course of the monetary policy. Instead, he pointed out that the government has in this Budget committed itself to a “new monetary policy framework”, which an RBI official said was an endorsement of the central bank’s inflation targeting plan.
It also paves the way for Rajan to appoint a chief operating officer at the RBI on par with the four deputy governors. Compared to the previous years, the official said the atmosphere at the meeting today was far more cordial.
The Finance Ministry’s confidence in RBI’s inflation targeting is a stark departure from the previous government, which was keen that the central bank should support growth-oriented policies through a lower interest rate regime. Upset with then RBI Governor D Subbarao’s decision to maintain status quo on rates, former Finance Minister P Chidambaram had in October 2012 stressed that growth was as much a challenge as inflation.
“If the government has to walk alone to face the challenge of growth, then we will walk alone,” he had said. In its bid to boost growth last year, the Finance Ministry had also bypassed the RBI and asked public sector lenders to provide cheaper loans for auto and consumer goods purchases.
Meanwhile, after Sunday’s meeting, Jaitley also expressed confidence that the government’s finances would improve over the next few months, while stressing that the disinvestment process is on schedule. “The department of disinvestment has already appointed advisors in some cases and the follow-up action is already progressing as scheduled,” said Jaitley.
Proceeds from stake sales in public sector enterprises are pegged at Rs 58,425 crore in FY 15 and the government is banking heavily on this non-tax revenue for meeting the fiscal deficit target of 4.1 per cent of the GDP.
However, with slow tax revenues, the fiscal deficit has already touched 56.1 per cent of the full year target in the first quarter of 2014-15. But Jaitley said the numbers do not show the correct picture and with higher tax revenues from September, the deficit would improve.
But Rajan has assured Jaitley he will keep the government’s borrowing programme well financed since the latter too had kept to his promise of a low fiscal deficit. Jaitley also needs Rajan to provide Rs 48,000 crore as dividend to finance some of it. The low inflation is also in sync with the government’s plan to keep prices low in a year when GDP growth is not expected to shoot up beyond 5.5 per cent.