RBI, FinMin on same page on fiscal prudence

Strong North Block-Mint Road ties to help economy sail through rough waters

Days after Reserve Bank of India Governor Raghuram Rajan made public his opinion that the government should stick to fiscal prudence, senior government officials said he had also written to the finance ministry about it.

The note from the governor was a reflection of the close coordination between North Block and Mint Road in a difficult financial year, a senior official said.


This made it easier for the mandarins to decide to stick to the target for reduction in the fiscal deficit while firming up the Budget numbers.

According to an official, strong support from RBI to the finance ministry would make it easier to maintain fiscal discipline in a year of massive challenges for the world economy. One official said it was only after the finance ministry and RBI closed ranks that the governor decide to make public his position.

At the C D Deshmukh memorial lecture on Friday, Rajan had backed fiscal consolidation over "aggressive" policies to boost economic growth.

While RBI governors and their teams have interacted with finance ministry mandarins in the budgeting exercise earlier as well, such a public endorsement before a Budget's presentation by the finance minister was rare.

In the note, Rajan was learnt to have said it did not make any sense for the government to fall short of its fiscal marksmanship by a narrow margin.

In other words, if the government planned to opt for a fiscal stimulus and change the goalposts, it should be decided up front as a policy and should be explained to the financial markets.

"It would only lower India's commitment to fiscal discipline if we came up short by a slim margin," one of the officials explained.

The government has been beset with difficulties attempting to reconcile the need to push additional public investment to make the economy grow faster, and balancing it with a tepid growth in taxes and other receipts.

It can only do so by borrowing more from the markets. But Rajan's argument against this would help the finance ministry with an additional line of argument to keep the books balanced instead. The government has already deviated from the fiscal consolidation path in FY16, postponing fiscal deficit targets by a year. Its plan to bring down the fiscal deficit to 3.6 per cent of GDP in 2015-16 has been postponed by a year.

The government was now targeting 3.9 per cent in the current financial year and 3.5 per cent in the next year.

Along with the Centre, even the state governments have opened up borrowing from foreign investors. Smart City and other projects, which require financing, would follow soon.

The costs of borrowings would shoot up if the fiscal targets come unstuck. Ratings agencies would be uncomfortable if the fiscal targets became wobbly. It is in this context that Rajan had cautioned against fiscal profligacy to spur growth, even as Jaitley has so far remained publicly non-committal on fiscal slippages.

The finance minister had said there were pros and cons of pushing growth by higher public spending and he would take a view on the issue at the time of the Budget. The Budget for 2016-17 would be unveiled on February 29.