RBI offsetting fiscal slackness: Subbarao

Subbarao said central bank's tight monetary stance is directed towards offsetting fiscal slackness.

Written by Press Trust Of India | New York | Published: August 29, 2012 7:57:31 pm

Highlighting the need for fiscal consolidation,Reserve Bank of India (RBI) Governor D Subbarao has said the central bank’s tight monetary stance is directed towards offsetting fiscal slackness.

“RBI (is) having to take on a tight monetary stance to offset fiscal slackness,” he said yesterday while delivering a lecture at Cornell University on ‘India in a Globalizing World: Some Policy Dilemmas’.

RBI raised policy rate 13 times between March 2010 and October 2011 in its bid to bring down inflation. It,thus,increased interest rate by 3.75 per cent during that period.

In its last policy review in July,RBI chose to keep interest rate unchanged citing inflationary pressure.

In 2011-12,the fiscal deficit had ballooned to 5.76 per cent of GDP on account of high fuel subsidy outgo.

The government aims to bring down the fiscal deficit- the gap between expenditure and revenue collection – to Rs 5.13 lakh crore or 5.1 per cent of GDP in the current fiscal.

Terming fiscal deficit as structural issue,Subbarao said “we have fiscal deficit in the face of current budget (revenue) deficit,implying borrowing is being used for consumption expenditure”.

“Political economy – including federalism – challenges in reducing fiscal deficit,” the RBI governor said.

Analysts believe that fiscal deficit could breach 6 per cent mark in 2012-13 in view of rising oil,food and fertiliser subsidy bills and lower revenue realisation due to concerns of economic slowdown.

For the April-June period,the fiscal deficit rose to Rs 1.9 lakh crore,or 37.1 per cent of the 2012-13 target.

Subbarao said fiscal deficit is bad for a number of reasons as it also exacerbates inflation.

“Even as investment has moderated,consumption remained strong benefitting from fiscal expansion. Fiscal deficit is adding to consumption demand,” he said.

Talking about the challenge in the path of fiscal consolidation,the RBI Governor said there are political economy issues including democratic compulsions and pressures of federalism.

Besides,”politicians in democracies have high discount rates,” he added.

The RBI chief said 6 per cent growth is not enough to bridge the income gap.

“India is a supply constrained economy…India growth story is still credible because the drivers of growth are intact,” he said.

On the domestic currency fall,Subbarao said,rupee depreciated by 12.7 per cent between March 2011 and March 2012.

Rupee depreciated further by 8.5 per cent between March-end 2012 and August 28,he added.

RBI sold USD 20 billion during September 2011 to March 2012,by way of intervention to curb excessive volatility,he said.

For all the latest News Archive News, download Indian Express App