Finance Ministry sets the record straight...

But North Block and the RBI still see the economy through different prisms

Both Finance Minister Arun Jaitley and his junior minister, Jayant Sinha, have been trying to play down  stories about the uneasy relationship between North Block and Mint Road. (For those not in the know, North Block houses the finance ministry while Mint Road is home to the Reserve Bank of India)

In a Facebook post, Jaitley castigated the media for stories that the finance ministry is putting pressure on RBI, calling it ‘reporting with an agenda’ while Sinha in an interview to The Economic Times on Tuesday said that the government and RBI are on the same page as far as interest rates are concerned.

It was sensible for the finance ministry to down play the overhyped tension with the central bank. But have things changed fundamentally?

Consider that the recent mid-year economic analyses for 2014-15, put together by economic advisors in the finance ministry, talked about beefing up public investment for economic revival but in the same breath reiterated their commitment to achieving a fiscal deficit target of 4.1% of GDP for the current fiscal. The commitment – which was also termed as challenging – comes despite tax collection estimated to fall short by Rs 1 lakh crore.

Even if the 4.1% target is achieved this year, what about the next two year when the targets are 3.6% and 3%, respectively, as per the government’s medium term policy statement?

If public spending needs to be beefed up then these targets are less likely to be achievable. 

The central bank, for its part, has emphatically highlighted the recommendations of the Urjit Patel Committee, which was formed to review the monetary policy framework and the need for fiscal consolidation in order to follow the glide path of bringing down inflation. Fiscal slippages will adversely impact inflation and inflation expectations which in turn  will jeopardise any possibility of easing the monetary policy stance.

The other factor that will weigh on the central bank’s decision is that the RBI, which has adopted the Urjit Patel committee’s recommendation, wants a monetary policy committee to be formed which will be accountable for achieving the inflation target. The revised monetary policy framework will need the government’s concurrence, if not lawmakers’ explicit approval.

There is no indication so far from the government about its thinking on the new framework. Mint Road and  North Block still seem quite far apart, both on paper and in practice.