The Reserve Bank has called upon the government to cut expenditure on subsidies and "use resources so released to step up public capital expenditures". "With limited fiscal and monetary space available to provide a direct stimulus,an expenditure-switching policy is needed that reduces revenue spending by cutting subsidies and using the resources so released to step up public capital expenditures," RBI said today in its annual report for 2011-12 fiscal ended on June 30. Flagging the twin deficits on the fiscal and current account fronts as the main fiscal concern,the report said this switching can help the government improve on both these fronts,while the RBI can accelerate its nearly three-old inflation,which it termed as still "sticky" more aggressively in the meanwhile. Admitting that its long-drawn battle against inflation through a tight monetary policy has contributed to the growth deceleration that has fallen below potential,it,however,defended the move saying price stability is needed to sustain long-term higher growth. Attributing slowdown to a combination of domestic and global factors,the report said,"Global macroeconomic and financial uncertainty,weak external demand,elevated prices,widening twin deficits and falling investments combined to adversely impact domestic growth." On the slowing investments,it said,"the investment climate worsened due to structural impediments,policy uncertainties inflation persistence and rising interest rates." Fiscal deficit has hit a high of 5.8 per cent last fiscal,while the current account deficit has hit 30-year high of 4.3 per cent for the full fiscal. The economic growth slipped to 6.5 per cent,0.2 per cent lower than the crisis year of FY'08,last fiscal as the elevated interest kept companies off implementing their investment plans,while despite nearly three years of anti-inflationary stance,inflation remained elevated. For July,the headline inflation dipped to 6.87 per cent,but still above the comfort level of RBI. Following this almost every agency has lowered the growth projection for this fiscal to a low of 5.3 per cent to 6.5 per cent.
