After doing its bit to give a push to the slowing economy, the Reserve Bank of India (RBI) had a strong message for the government: Clear supply bottlenecks, curb subsidies and hike petroleum product prices. The measures are expected to improve fiscal health and contain inflation.
Supply bottlenecks on a variety of fronts — infrastructure, energy, minerals and labour — were responsible for the apparent decline in trend rate of growth. The government must address these problems to increase the economy’s potential, said the apex bank.
RBI, in its annual policy for FY13, said fiscal deficit has remained elevated since 2008-09. Fiscal slippage in 2011-12 was also significantly high. While the Budget spoke of reducing deficit in FY13, there were certain upside risks to it. Containing non-Plan expenditure with Budget estimates was dependent on sticking to a cap on subsidies.
The Reserve Bank has reservations about room for government to translate commitment into action, especially on the oil subsidy front. At present, international crude oil prices are ruling high.
Going by the burden-sharing pact with oil marketing companies, the Budget estimate to compensate them for under-recoveries may fall short. Any slippage in the fiscal deficit will have implications for inflation.
Further, the large fiscal deficit has also led to large government borrowing. Net market borrowing for 2012-13 is pegged at Rs 4.8 lakh crore, higher than the expanded Rs 4.4 lakh crore in 2011-12. Such borrowings can potentially crowd out private sector credit. Crowding out of the more-productive private sector’s credit demand will become more critical if there is fiscal slippage.
Inflation in protein-based items continues to be in double digits with little signs of trend reversal. This is mainly because of structural imbalances in such commodities. The government has announced steps to redress protein-inflation in the medium to long term. In the near future, the pressure on prices of protein-rich items will continue to be a risk factor for food inflation.