A day before the Reserve Bank of India (RBI) was to review the policy rates, finance minister P. Chidambaram took centre stage and announced a medium-term fiscal consolidation plan—something the central bank had made a prerequisite ahead of cutting policy rates.
The coincidence of the timing is not accidental.
In the normal course, this should have served as the trigger for RBI to follow up with a rate cut on Tuesday. However, the stock market’s muted response to the government committing to the blueprint laid out by the Kelkar committee is telling.
There is a time to boost market sentiment through feel-good remarks and there is a time when only doing the right things matter. And this is exactly what seems to have happened today; statements need to be backed up with credible action.
The finance minister is in an unenviable position. His heart is in the right place, but his hands are tied. A credible fiscal deficit plan would require, among other things, fixing the fuel price riddle—the simplest solution being to float diesel prices. And for all practical purposes, this is not a part of the consolidation plan as yet; given that it is already election season, it is unlikely to draw political support.
Given the government’s previous record of adhering to promises of fiscal consolidation, it is no surprise then that the stock markets are not willing to buy into the FM’s promise.
The United Progressive Alliance (UPA) may do well to remember the proverbial fairy tale in which a shepherd boy runs down his credibility with the locals by twice falsely claiming to have sighted a wolf. When the wolf did actually turn up the third time, no one turned up to assist the shepherd boy when he cried Wolf!