The finance ministers fiscal deficit road map may reassure RBI. But will it engage investors? The timing of Finance Minister P. Chidambarams statement,a day ahead of the Reserve Bank of Indias announcement of its second quarter review of monetary policy,is not incidental. The ministers projection of a fiscal deficit road map till 2016-17 is arguably intended to assure Governor D. Subbarao that the government has rediscovered its zeal to keep to the right side of the fiscal deficit. Significantly,for the next fiscal,too,Chidambaram has projected that the government will keep the deficit at a creditable 4.8 per cent of the GDP. The numbers are short of Vijay Kelkars road map,commissioned by the finance ministry about a month ago,but the difference of 0.2 per cent in the two projections is unlikely to matter. The RBI was obviously expecting something along these lines,as was made obvious in its own review of the macro-economic and monetary developments for the first quarter,issued later in the day. A credible fiscal consolidation strategy is now on the anvil,noted the RBI review,but it needs to be backed by further measures. The worry for the bank is that the finance ministrys fiscal math still does not add up. The expected deceleration of growth to 6 per cent,along with an inflation rate of 7.5 per cent,yields a nominal growth rate of 13.5 per cent,lower than the initial projections. This should push up the fiscal deficit but the finance minister has evidently assumed a lower growth in expenditure,possibly through deferring the oil bill of the companies to the next fiscal. He has little headroom on the revenue side as the lower growth rate of tax revenue at 14.2 per cent and a less than expected telecom auction revenue at a third of the expected Rs 40,000 crore means he has to ensure that the disinvestment of Rs 30,000 crore goes through. The minister has kept open the option of deferring the announcement of the borrowing programme for the last quarter of the year to January and assured the current account deficit will be kept in control by welcoming foreign investments. The announcements did not excite the financial sector even though a rate cut now looks more certain. Equity indices and rupee markets have already factored it in. The key question for the economy now is whether the Rs 2,60,000 crore of stalled large investment projects will begin to move soon.
