RBI surprises, now over to North Block for fiscal consolidation

Further scope for interest rate cuts dependent on success in meeting deficit targets.

Written by Surabhi | New Delhi | Published:January 16, 2015 2:27 am

The assertion by the Reserve Bank of India that “high quality fiscal consolidation” would be one of the determining factors for further monetary policy easing, the fiscal consolidation roadmap to be spelt out by finance minister Arun Jaitley in the upcoming Budget for 2015-16 could hold the key to further cuts by the central bank.

Especially in the light of the indications offered by the finance minister earlier that the government would step up public spending in infrastructure projects next fiscal to spur growth, something that could cast a shadow over the fiscal deficit target of 3.6 per cent in 2015-16 and 3 per cent in 2016-17 set out in the medium-term rolling targets in the Budget 2014-15.

For the current fiscal, the finance ministry is betting on revenue from sale of spectrum and disinvestment proceeds, along with internal savings from the fall in crude oil prices, to help contain the fiscal deficit at the targeted 4.1 per cent of the GDP in 2014-15.

“The fiscal deficit target will be met for 2014-15. A part of the disinvestment proceeds will be realised along with at least Rs 40,000 crore from sale of spectrum in this fiscal,” said a senior official, adding that the strategy for next fiscal is still being worked out.

The report of the Expenditure Management Committee as well as the Fourteenth Finance Commission will also play a major role in defining the fiscal consolidation plan for the years ahead.

Meanwhile, in 2014-15, the finance ministry is also banking on the drop in global crude oil prices and the delayed roll out of the National Food Security Act by state governments to help it save on the subsidy bill.

Global crude oil prices have fallen below $50 a barrel and the government estimates at least Rs 40,000 crore savings in its fuel subsidy bill this fiscal.

“In no year till date government ministries have been able to spend all their Budgetary allocations. This too will result in savings from the expenditure target of Rs 17.94 lakh crore,” said a senior government official adding that tax payments too will come in the fourth quarter of the fiscal, helping meet the fiscal deficit target.

The Centre’s fiscal deficit touched 99 per cent of its full year target by November 2014 and analysts have raised concerns over fiscal consolidation efforts.

Pegging the fiscal deficit at 4.2 per cent in 2014-15, India Ratings on Thursday said the Centre will miss its Budget target marginally and the deficit would be 3.9 per cent in 2015-16. “Although events such as a dramatic fall in global crude prices, an increase in excise on petrol and diesel, cancellation of coal block allocations cancellation of coal block allocations and penalties imposed, higher surplus transferred by RBI to the government and the announced 10 per cent cut in the non-plan expenditures … will still not be enough to bridge the gap arising out of the shortfall in tax and non-tax revenue,” it said in a report.

RBI governor Raghuram Rajan while announcing the 25 basis cut in repo rate, had listed continuing disinflationary pressures, fiscal consolidation and steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure as crucial for monetary easing.

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