In a bid to persuade the central bank to go for a policy rate cut in its quarterly monetary policy review on Tuesday, finance minister P. Chidambaram unveiled a medium-term fiscal consolidation road map.
Under this, the government has committed to contain the fiscal deficit, or gross borrowings, at the projected level of 5.3% of gross domestic product (GDP) in 2012-13 and further reduce it to 4.8% of GDP in 2013-14.
“The government is determined to bring about fiscal consolidation,” Chidambaram said at a press conference, before subtly signalling to RBI: “And I sincerely hope that everybody will read the statement and take note of that.”
Arvind Mayaram was blunt. “(The) ball is now in the RBI’s court. The government had decided on what it has to do, now they have to take a call.”
Since the blueprint for fiscal consolidation did not carry details on how the government proposes to cap the runaway rise in subsidies on fuel, fertilizer and food, it is not clear whether RBI will be convinced.
“It (fuel subsidy revamp) is not part of the recommendation (of the Vijay Kelkar panel) we have accepted right now. It is being discussed separately,” Chidambaram said while responding to a specific question on fuel subsidies.
In its mid-quarter monetary policy review on 17 September, RBI lowered the cash reserve ratio (CRR) by a quarter percentage point, but kept its key rates unchanged, citing persistently high inflation. The central bank, which frontloaded its rate cut by going for a half percentage point reduction in April after raising rates 13 times since March 2010, didn’t promise any future rate cuts, but said it would monitor the growth-inflation dynamic and manage liquidity to help meet the credit demands of borrowers. Headline inflation as measured by the Wholesale Price Index has since increased to a 10-month high of 7.81% in September from 7.55% in August.
Explaining his fiscal consolidation road map in the current fiscal, the finance minister said he expects to realize the budgeted receipts under disinvestment and non-tax receipts. The government has set a target of garnering Rs.30,000 crore by diluting its stake in public sector undertakings such as Hindustan Copper Ltd, Bharat Heavy Electricals Ltd and MMTC Ltd. It also expects to receive Rs.40,000 crore from the auction of second-generation telecom spectrum. “Every effort will also be made to realise the revenues budgeted under tax receipts,” he added.
Chidambaram said the government plans to “contain and economize” on both plan and non-plan expenditure. “While funds will be made available for essential expenditure, especially capital expenditure, every effort will be made to avoid parking or idling of funds. As regards subsidies, government will also increasingly rely on Aadhaar-enabled direct cash transfers of merit subsidies to eliminate duplication or falsification,” he added. Aadhaar is the unique ID programme of the government that is aimed at ensuring, among other things, that benefits reach their intended target.
Abheek Barua, chief economist at HDFC Bank Ltd, said the announcement lacked credible details and was based on questionable assumptions. However, Barua said the reasonable chances of a repo rate cut and a CRR cut had increased.
However, Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, ruled out a rate cut. “RBI is looking at measures that government will take to contain public expenditure, which will, in turn, impact aggregate demand and inflation. Achieving fiscal consolidation through meeting the (non-tax) revenue targets have no meaning for the central bank,” he added.
Chidambaram said the government has accepted a number of reform measures suggested by the Vijay Kelkar committee such as reviewing the Direct Taxes Code before introducing it in Parliament, rationalization of schemes and strict control of expenditure. Signalling the government’s willingness to divest its remaining stake in Vedanta-controlled Bharat Aluminium Co. Ltd, Chidambaram said the committee’s recommendation to “disinvest its residual stake in some companies that were privatised earlier” has also been accepted.
A high-level panel under former finance secretary Kelkar had recommended measures to reduce the fiscal deficit, a measure of the difference between government revenue and expenditure that is met by market borrowings. The committee had warned that the deficit could go up to 6.1% of GDP in the current fiscal without subsidy reforms, while it could be reined in at 5.2% of GDP if subsidy reduction measures were carried out.
The finance ministry is over optimistic about being able to achieve various budget targets such as disinvestment, said Kunal Kumar Kundu, senior economist and general manager, India, Roubini Global Economics.
“More than six months have passed in the current financial year and we have not seen any government stake sale happening,” he said. “It is very difficult to believe that in the remaining five months they will achieve the disinvestment target.”
Barua said what the government lacks is a buffer plan such as selling part of its huge landholdings as suggested by the Kelkar committee or winding up the Specified Undertaking of the Unit Trust of India (SUUTI) in case it misses its other revenue targets. Chidambaram on the other hand said the government does not have any plans to dilute its SUUTI stake.
Chidambaram said the government hopes the current account deficit in this financial year will come down to 3.7% of GDP from 4.2% last year. He said that the substantial part of the $70.3 billion required to finance CAD will be met through foreign direct investments, foreign institutional investments and to the extent desired through external commercial borrowings.
Elizabeth Roche also contributed the story.