The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) may have been given sufficient hints for its upcoming policy from Union Finance Minister Nirmala Sitharaman after she used the opportunity provided by the panel on fiscal consolidation to perk up the slowing economy.
Sitharaman used the escape clause given by the Fiscal Responsibility and Budget Management (FRBM) committee, headed by former bureaucrat N K Singh, to its maximum to take up counter-cyclical measures (see chart).
Experts believe that MPC may opt for status quo in the policy rate for the second time in a row after the government widened its fiscal deficit by 0.5 percentage points each for 2019-20 and 2020-21.
Aditi Nayar, principal economist at ICRA, said the RBI is on an extended pause so far as the policy rate is concerned and the Budget for 2020-21 gave comfort to the central bank in this direction.
A rising fiscal deficit is generally associated with rising inflation, another point that RBI might take into consideration when its MPC meets for three days from February 4.
Aditi said the consumer price index (CPI)-based inflation rate is anyway expected to be around four per cent till September.
The CPI inflation rate rose to an over five-year high of 7.35 per cent in December, breaching the upper range of 2-6 per cent within which the central bank is expected to keep the rate of price rise. The inflation rate was driven by food prices. The food inflation rate stood at 14.12 per cent in December, the second successive month when it was in double digits.
In its last meeting, the MPC had said the Budget would provide better insight into further measures the government would take to spur growth, so it felt it appropriate to pause at this juncture.
The government projected its fiscal deficit at 3.8 per cent for FY20 against the Budget Estimates (BE) of 3.3 per cent, and 3.5 per cent for FY21 against 3 per cent given in the papers under the FRBM Act.
The government had to cut its expenditure by Rs 87,757 crore compared to BE for 2019-20 as tax revenues fell short by close to Rs 3 trillion and disinvestment receipts by close to Rs 35,000 crore. Some part of the revenue shortfall was met by higher non-tax revenue of Rs 32,000 crore, pushed up by a capital transfer from the central bank to the government of over Rs 1.76 trillion.
“The deviation of 0.5 per cent on account of unanticipated fiscal implications looks reasonable. The task of coming back to the consolidation will be easy in case there is an improvement in tax buoyancy,” Abhishek Rastogi, partner at Khaitan & Co, said.
He said the finance minister announced various measures to improve tax buoyancy such as an improvement in compliance, an amnesty scheme for direct taxes and harsh provisions for tax frauds.
The fiscal deficit is pegged at Rs 7.96 trillion for FY21 against Rs 7.66 trillion in the Revised Estimates for the current fiscal year. However, the government will borrow Rs 5.44 trillion, net of repayments, from the market next fiscal year against Rs 4.73 trillion in the current fiscal year. The rest of the finances will come from the other sources such as the National Small Savings Fund (NSSF).
This has been the widest deviation from the fiscal deficit seen by the Modi government in its seven Budgets so far. However, successive governments before him have also failed to rein in fiscal deficit at three per cent of GDP.
The target of three per cent was originally scheduled for 2007-08, but it was deferred by a year at the time. Then 2008-09 saw the ripple effects of the global financial meltdown, forcing the government to offer a stimulus to the tune of Rs 1.8 trillion. That widened the fiscal deficit to over six per cent from 2.5 per cent estimated at the stage of BE that time.
After that, three per cent was targeted many times, but it has never been achieved.
In fact, papers laid on the table of the House under the FRBM Act do not even talk of fiscal deficit at three per cent till 2022-23.