RBI policy: With GST complicating Narendra Modi govt’s budget math, MPC may hold its fire for now

Will the Monetary Policy Committee (MPC) gift a rate cut on 6 December to thrill the stock markets ahead of Christmas? The odds are against it. With retail inflation inching up to 3.58 percent in October from 3.28 percent in September, growth seems to have picked up, at least temporarily, with the GDP (gross domestic product) numbers inching up to 6.3 percent in July-September quarter from 5.7 percent in the preceding quarter spurred by jump in manufacturing. Commodity prices are inching up globally, so is crude (touching $64 a few days back) and, to top it all, the Narendra Modi government is set to launch its last full budget of this term largely based on guesswork, as former chief statistician Pronab Sen  said. The government has only four months of indirect tax collection data to base its revenue estimates and growth projections for the budget scheduled on 1 February, 2018. In this context, the MPC will be making a mistake by tinkering with rates without knowing which way the wind is blowing. There are other factors too that will come into play. For instance, the MPC members will be spending considerable time over what will be the inflationary impact of the Rs 9 lakh crore economic stimulus announced by the government to lift the animal spirits in the economy. Of this package, Rs 2 lakh crore is to infuse state-run banks. The MPC will appreciate the move to capitalize banks and boost infrastructure spending (almost every policy document mentioned these demands), but may not be happy if the government crosses the red line on the FRBM (fiscal responsibility and budget management target) roadmap. The government needs to stick to 3.2 percent fiscal deficit target this year, but the problem is that it has already exhausted 96 percent of the full year target in August. [caption id=“attachment_4196473” align=“alignleft” width=“380”]  Reuters image[/caption] As mentioned above, this time, the making of the budget will be watched closer than ever for two reasons; one , it is the last opportunity for the Modi-government to roll out a populist budget and appease voters ahead of the 2019 general polls. Two, the data inputs available for budget-makers, particularly on indirect tax data, is either incomplete or weak. The inconsistencies linked to the Goods and Services Tax (GST) rates and compliance might have led to considerable distortions in the revenue trends, critical for policymakers to work out projections for the coming full year. This is the reason why Pronob Sen called the budget-making a guesswork. If inflation continues to inch up and linked factors flash risk, the MPC will be left with no option but to move on to a rate hike mode. At this stage, more than a monetary boost, the improvement in the ground level economic situation can offer the much-needed push to the economy. This will also depend on how well the government plans to implement the economic stimulus package. The short point here is that, one shouldn’t expect fireworks from the Reserve Bank of India (RBI) and MPC tomorrow (Tuesday). More than policy rate decision, the language of the policy document on growth and inflation will be critical to watch. For full coverage of Union Budget 2018, click   here.