Fiscal deficit will surely be below FM's red line: Rajan

The govt plans to contain fiscal deficit within 4.8% of gross domestic product for current financial year

Three days before Finance Minister P Chidambaram presents the interim Budget, Reserve Bank of India (RBI) Governor Raghuram Rajan praised the government for its efforts to meet the fiscal deficit target for this financial year. He said he had no doubt the target would be met, adding good fiscal control would enable the central bank to fight inflation.

Budget 2013-14 had estimated the government’s fiscal deficit at 4.8 per cent of gross domestic product, compared with 4.9 per cent in 2012-13. Chidambaram has often described the 4.8 per cent mark as a red line and assured the government wouldn’t exceed this.

“I have no doubt the fiscal deficit for 2013-14 will be close to, or below, the finance minister’s red line,” Rajan said, while delivering the 10th D R Gadgil Memorial Lecture here. “However, we need to continue on the path of fiscal consolidation, constantly improving the sustainability and quality of fiscal adjustment. It is very important we spend money on needed public investment, while reducing misdirected subsidies and entitlements.”

The governor sounded a word of caution on regulating energy prices and favoured allowing these to be linked to market levels, saying this would reduce inflation. “The reason is higher prices will reduce excessive consumption, reduce subsidies and fiscal deficits, and incentivise investment and competition, while allowing prices to be determined by an increasingly stable and plentifully supplied global market for energy. The consequences of inappropriate or inadequate price adjustments will be RBI will have to bear more of the burden in combating inflation,” he said.

Rajan complimented the government for its efforts to revive growth and narrow the country’s current account deficit. “Growth is stabilising due to a good harvest, strengthening exports and some early signs of resumption of large stalled projects. However, it is still very weak,” he said.

Experts have voiced doubt on whether the fiscal deficit target would be met. While the government is cutting expenditure, there is concern about the higher subsidy bill and challenges on the revenue front. Also, the depreciation of the rupee during the April-August period will put pressure on the import bill.

The government’s fiscal deficit will be announced by the finance minister on Monday, when he presents the interim Budget. The full Budget will be presented after the general elections, expected in April-May.

On the changes in priority sector lending norms suggested by the Nachiket Mor committee last month, Rajan said, “These are interesting ideas and we will explore these in greater detail.”

The panel had suggested a weightage-based approach to priority sector lending norms. Banks, it had said, should leverage their individual strengths — while a bank strong in farm credit should leverage this, another bank strong on the small enterprises front should focus in that area. Currently, banks are given segmental targets under each category.

The Mor committee also mentioned credit-deprived areas such as the Northeast, as well as incentivising banks to lend more in such regions by giving greater weightage. “The weights will be adjusted so that overall targets are met by the system,” Rajan said.

On financial inclusion, he said “Despite RBI’s exhortations, few banks have reduced their demand for documentation; they fear they will be held responsible if something goes wrong, no matter what the regulatory norms. The acceptance of third-party KYC (know-your customer) certification is particularly difficult.”

He reiterated the individuals without bank accounts would be able to receive money from those with bank accounts, using automated teller machines (ATMs). “We have recently approved the in-principle setting up of a payment system that will facilitate funds transfer from bank account holders to those without accounts, through ATMs.”

Guv moots trade-receivables exchange

To facilitate credit flow to micro, small and medium enterprises (MSMEs), the RBI is considering setting up a trade receivables exchange. “Technology can also be used to facilitate credit…MSMEs are squeezed all the time by their large buyers, who pay after long delays. All would be better off if MSMEs could sell their claim on large buyers in the market,” said RBI Governor Raghuram Rajan.

He added the large buyers of MSME products set the terms and condition for payments and typically, paid after a long gap. “The MSME will get its money quickly, while the market will get a claim on the better-rated large buyer, instead of holding a claim on the MSME. The large buyer could get a better price for his purchases. All this requires setting up a trade-receivables exchange, which RBI has been discussing with market participants,” he said.