On Tuesday, the Rajan of Mint
street sent a to-do list to the North Block, without leaving any room for
ambiguity to the latter on the crucial tasks to be achieved, essential to get
the economy back on the high-growth orbit.
Reserve Bank of India (RBI) governor
Raghuaram Rajan wants finance minister Arun Jaitely to get his fiscal
arithmetic precise in the forthcoming 2016 Union Budget, slated for 28
February, mooting credible steps to fast-track 'structural reforms', continuing
with the public spending and honouring the fiscal consolidation path.
If Jaitley manages to take Rajan
into confidence with a good budget 'package' — something that absorbs the
fiscal shock on account of a higher wage bill — and if oil remains where it is
and monsoon favour, Rajan would deliver the next rate cut, else will remain on
hold. That's the short message from the sixth bi-monthly monetary policy.
The big take away from the
monetary policy, a non-event otherwise, is the emphasis central bank has
attached on growth-oriented structural reforms from the Narendra
Modi-government. It has warned the government not to pin hopes solely on the
monetary policy to work wonders for Asia’s third largest economy.
So far, the Modi government hasn’t
managed to pull off large ticket reforms such as passage of GST even though it
has introduced a slew of incremental reform steps.
Following are the key messages
from Rajan to Jaitley:
For one, Rajan wants Jaitley to
list out measures in the budget to revive the growth drivers in the economy.
“Underlying growth drivers need to be rekindled to place the economy durably on
a higher growth trajectory. The revival of private investment, in particular
has a crucial role, especially as the climate for business improves and fiscal
policy continues to consolidate,” Rajan said.
As Firstpost has highlighted in
the past, rate cuts have hardly contributed to high growth so far as banks have
been reluctant to cut their rates.
Despite a 125 bps rate cut by the
RBI since January, banks have passed on only less than half of this headroom to
the end borrower, resulting in higher cost of bank money. The RBI, arguably,
has failed to force banks to make monetary transmission effective in the
banking system, despite the liquidity remaining tight.
Secondly, there is clear warning
to Jaitley on the persisting stress on the ground and the reversal in the
larger trend of stalled projects, even though the RBI expects growth to happen
shouldered by lower input costs, improving real incomes of households (as
inflation declines) and expected normal monsoon after two consecutive seasons
of failed monsoons that hit the farm sector hard.
Citing the data from the Centre
for Monitoring Indian Economy (CMIE) Rajan has worried on the increase in the
stalled projects in recent quarters. According to the CMIE data, the chunk of
stalled projects increase to Rs 10.7 lakh crore as of end-December as compared
with Rs 10.5 lakh crore as of end-September.
Another set of data from CMIE
said fresh investments in projects fell 74 percent in the December quarter to
Rs 1.05 lakh crore from Rs 4.06 lakh crore in the corresponding period last
year, putting the onus on the government to keep pumping in money to maintain
the growth momentum. “Public spending is important,” Rajan said.
Thirdly, even while acknowledging
that public spending is important, the RBI warns the government on the need to
stick to the fiscal consolidation path, making Jaitley’s budget arithmetic a
lot more complex. “The Indian economy is currently being viewwed as a beacon of
stability because of the steady disinflation, a modest current account deficit
and the commitment to fiscal rectitude. This needs to be maintained so that the
foundations of stable and sustainable growth are strengthened,” Rajan said.
The government, which is running
on a delayed fiscal consolidation path, wants to bring down country’s fiscal
deficit to 3.9 percent in the current fiscal year and the further to 3.5
percent in 2016-17 and 3 per cent by fiscal year 2018.
For Jaitley, meeting the fiscal
deficit targets will be a tough task on account of higher spending on account
of 7th Pay Commission payout in 2016-17 (which will put an additional burden of
Rs 1.02 lakh crore on the government’s finances). Also, the government hasn’t
managed to progress much on the disinvestment programme (it has raised Rs
12,700 crore in the current fiscal as against a target of Rs 70,000 crore).
There aren’t many options for
Jaitley to meet the fiscal deficit target under check. It will need to either
aggressively cut down public expenditure (which isn’t good for a struggling
economy) or increase resources by increasing taxes on individual segments and
pushing divestments. Rajan will keenly look for how wisely Jaitley does his
fiscal math.
In the presser that followed the
monetary policy, Rajan didn’t specifically answer to a question on what is the
fiscal deficit number he is looking for from the budget. “The budget has to be
viewed as a package. It’s hard to say this number (is what the RBI is watching
for),” Rajan said.
But, the monetary policy
statement makes it crystal clear what Rajan wants from Jaitley to effect
further rate cuts. “Structural reforms in the forthcoming union budget that
boosts growth while controlling spending will create more space for monetary
policy to support growth.” That’s a direct message to Jaitely.
No comments:
Post a Comment