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Stimulus, farm waiver to push up fiscal deficit by 1%, says RBI

RBI has persistently flagged concerns on fiscal slippages and also on farm loan waivers, which it fears will wreck the credit culture

Press Trust of India  |  Mumbai 

Stimulus, farm waiver to push up fiscal deficit by 1%, says RBI

Cutting its estimate for the current fiscal, the RBI on Wednesday warned that any economic stimulus and farm debt waivers could push up fiscal deficit by 1 percentage point, potentially stoking

Such measure could lead to surging by 0.50 per cent, the Reserve of (RBI) said in the Monetary Policy Report released along with the fourth bi-monthly monetary policy statement for 2017-18 on Wednesday.

"Real GVA (gross value added) is projected at 6.7 per cent for 2017-18 -- 6.4 per cent in Q2, 7.1 per cent in Q3 and 7.7 per cent in Q4 -- with risks evenly balanced around this baseline path," it said.

The RBI, in August, had pegged at 7.3 per cent for 2017-18 on a GVA basis.

With the mulling a stimulus package to revive the sagging growth, the RBI cautioned that a 0.50 per cent slippage in the Centre's fiscal deficit alone can increase by 0.25 per cent.

"... the combined (Centre plus states) fiscal deficit to ratio may increase by around 100 bps in 2017-18," it said.

Referring to a 2005 study, the central said, "higher fiscal deficits per se can lead to an increase in inflation expectations and actual inflation".

It explained that there exists a long-running relationship between fiscal deficits and inflation in

Empirical estimates, according to the RBI, suggest "that an increase in fiscal deficit to ratio by 100 bps could lead to a permanent increase of about 50 bps in inflation".

Under pressure because of a slowing growth, which slipped to a three-year low of 5.7 per cent in April-June, the is weighing steps for economic revival, which may include a stimulus package of up to Rs 40,000 crore, according to reports.

The Reserve has been persistently flagging concerns on and also on farm loan waivers, which it fears will wreck the credit culture.

In upside risks to its inflation forecast, where the RBI expected price rise to move up to 4.6 per cent by the March quarter of 2018 from 3.4 per cent in August, the central bank flagged possible due to farm and potential stimulus measures.

Other upside risks to its estimate include the expected increases in salaries and allowances by state governments and short-term uncertainty because of

The RBI estimated headline inflation to rise to 4.2 per cent by the December quarter.

Professional forecasters expect inflation to rise to 4.5 per cent by the March quarter, it said.

First Published: Wed, October 04 2017. 15:56 IST