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Finance Minister (FM) Arun Jaitley and Reserve Bank of India (RBI) Governor Urjit Patel on Saturday said the movement of oil prices was uncertain. But, the FM was confident that there would be no fiscal slippage next financial year, thanks to buoyancy in revenue.
Addressing journalists after the post-Budget interaction between the FM and the RBI board, Patel said decisions of the Monetary Policy Committee (MPC) were forward-looking and not based on the day-to-day inflation rate. He added credit growth and the corporate debt-equity ratio were improving, and transmission of RBI policy decisions had improved since demonetisation.
The government had demonetised Rs 1,000 and Rs 500 notes in November 2016.
“We observed that in recent times oil prices had two-way movements. We need to be prepared for these movements because these are difficult to predict,” Patel said. He added some advisors had said a few months ago oil prices would not cross $45 a barrel.
Global oil prices have cooled in the past few days, but concerns remain about potential headwinds. For instance, US crude plunged to a seven-week low of $58.07 a barrel, before paring losses on Friday to touch $59.20.
Jaitley said the fiscal situation would be comfortable next financial year and there were no concerns about slippages from the deficit targets.
The Budget for 2018-19 has fixed the Centre’s fiscal deficit target at 3.2 per cent of gross domestic product (GDP), 2 percentage points higher than the consolidation road map. For this financial year (2017-18), the government has revised the fiscal deficit target to 3.5 per cent of GDP from 3.2 per cent earlier, following revenue losses of Rs 350 billion due to the implementation of the goods and services tax. In its recent monetary policy review, the RBI had said the fiscal slippage could impinge on its inflation outlook, as it had wider implications such as rising costs of borrowings.
At the board meeting, the budgetary proposal for fixing the minimum support price for kharif crops at least 1.5 times that of the cost of production was also discussed. “It was an academic discussion,” said Jaitley. Responding to a query on if the RBI had missed the bus on cutting rates, as inflation had started rising, Patel said the MPC had explained its reasons for inflation targeting. Jaitley added that he considered the MPC’s decision to be a “balanced” one.
Patel said GDP growth was showing an upward trend. The RBI has projected gross value added (GVA) growth for 2018-19 to be 7.2 per cent. For 2017-18, it expects GVA to grow 6.6 per cent, higher than the Central Statistics Office’s prediction of 6.1 per cent. Both the RBI governor and the FM seemed upbeat about credit growth. “With the recapitalisation of banks, lending capacity will increase,” said Jaitley.
Patel said the capital market’s contribution to fund-raising had increased. “We will have a better equity-debt ratio (for corporate entities). We already have about 11 per cent credit growth,” he said. He also said an inflated stock market would not cause a major problem. Referring to the recent rout in the domestic and global stock markets, Patel said, “There has already been a correction. It underscores how capital markets can change direction.”
The RBI governor said all experts were of the opinion how the cycle of high equity prices could not last too long. “This means there is enough risk aversion, built up by investors themselves,” he said, adding the RBI and the Securities and Exchange Board of India needed to take cognisance of risks.