New York: Highlighting the need for fiscal consolidation, Reserve Bank of India (RBI) Governor D Subbarao has said the central bank’s tight monetary stance is directed towards offsetting fiscal slackness.
“RBI (is) having to take on a tight monetary stance to offset fiscal slackness,” he said yesterday while delivering a lecture at Cornell University on ‘India in a Globalizing World: Some Policy Dilemmas’.
RBI raised policy rate 13 times between March 2010 and October 2011 in its bid to bring down inflation. It, thus, increased interest rate by 3.75 percent during that period. In its last policy review in July, RBI chose to keep interest rate unchanged citing inflationary pressure. In 2011-12, the fiscal deficit had ballooned to 5.76 percent of GDP on account of high fuel subsidy outgo.
The government aims to bring down the fiscal deficit- the gap between expenditure and revenue collection – to Rs 5.13 lakh crore or 5.1 percent of GDP in the current fiscal. Terming fiscal deficit as structural issue, Subbarao said “we have fiscal deficit in the face of current budget (revenue) deficit, implying borrowing is being used for consumption expenditure”.
“Political economy – including federalism – challenges in reducing fiscal deficit,” the RBI governor said. Analysts believe that fiscal deficit could breach 6 percent mark in 2012-13 in view of rising oil, food and fertiliser subsidy bills and lower revenue realisation due to concerns of economic slowdown.
For the April-June period, the fiscal deficit rose to Rs 1.9 lakh crore, or 37.1 percent of the 2012-13 target. Subbarao said fiscal deficit is bad for a number of reasons as it also exacerbates inflation.
“Even as investment has moderated, consumption remained strong benefitting from fiscal expansion. Fiscal deficit is adding to consumption demand,” he said.