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The Budget that aims to limit fiscal deficit to 3.5% of GDP in 2016-17 has been able to provide room for easing of the key policy rate by the Reserve Bank, Minister of State for Finance Jayant Sinha today said.
"Macroeconomic stability is fundamental to ensuring that monetary policy has space. If we don't provide that monetary policy space by generally a tighter fiscal policy, we cannot expect monetary policy to loosen up," he said while speaking at an event of the Indian Private Equity and Venture Capital Association (IVCA) here.
"So, that is the kind of environment we have tried to create on the macro side (in the Budget)."
There is widespread speculation that RBI is going to cut policy rate soon as the government has walked a tightrope on the fiscal deficit.
Amid debate over balancing growth and financial management, Finance Minister Arun Jaitley adhered to the fiscal consolidation road map by proposing to keep the deficit at 3.5% of GDP in 2016-17.
The fiscal deficit in the current fiscal has been estimated at 3.9%, which will be brought down to 3.5% in the next fiscal as per the Budget 2016-17.
Citing the example of the previous NDA rule, he said this is what had happened in 1999-2001.
"There was fiscal consolidation, the current account deficit came down, inflation came down. As that happened, interest rate, which was very high over 10-12%, came down quite dramatically," he said.
With regard to the proposed goods and services tax (GST), Sinha said it is stuck in the Upper House but may get passed.
"GST is stuck in the Rajya Sabha, but we are very hopeful that the bankruptcy law will be passed. Even for GST, the numbers (in the Rajya Sabha) are going to change... So, we are hopeful of GST as well," he said.
On banking sector reforms, Sinha said the government has announced its intent for consolidation in the sector in the Budget.
"As far as IDBI Bank is concerned, we are going to transform it. We can potentially drop below 50% as part of strategic disinvestment. We have made a very strong statement around that. We have consolidation process of public sector banks (that has) started," he said.
The government currently holds 80.16% in IDBI Bank.
"All of us as citizens of India own 27 public sector banks. Once the consolidation process starts, I do not think we will have 27 public sector banks (going forward)," he said.