HYDERABAD: The RBI’s Monetary Policy Committee (MPC), which met on June 6, has once again agreed to disagree. This time, however, dissent wasn’t on the usual policy rate discourse, but on the government’s off-budget financing, which rattled even the Comptroller and Auditor General of India.
The six-member MPC’s take on fiscal policy was split into 2-2-2. While two members —Pami Dua and Michael Debabrata Patra — didn’t comment, Chetan Ghate and Viral Acharya literally called out the government’s fiscal management as skillful deception, while RBI Governor Shaktikanta Das and Ravindra H Dholakia countered their views reposing faith in the centre’s book balancing act.
Among the remarks, the most damning came from Dr Chetan Ghate, who felt that the current fiscal policy practice was making MPC’s job difficult and the ‘large swings’ in government final consumption expenditure in fourth quarter to meet fiscal deficit targets leads to volatility in growth rates. Ghate didn’t mince words, proceeding to note, “Fiscal ‘prestidigitation’ or sleight of hand may contribute to our own version of a “doom-loop”, i.e., by pushing expenditure off budget to meet deficit targets and then recourse to borrowing from the national small savings fund by state entities keeps administrative interest rates high to incentivise such savings. This impedes monetary transmission.”
As per estimates, public sector borrowings, which account for extra-budgetary resources and other off-balance sheet borrowings, stood at 8-9 per cent of GDP in FY18.Acharya too felt such borrowings impairs monetary policy transmission due to crowing out effect on market financing through public bonds and on bank deposits through small savings. “This channel bites particularly when the domestic savings rate is on a decline and increases economy’s reliance on external sources of funding.
The upcoming Union Budget is, therefore, key to understanding the inflation outlook,”he noted adding, “I worry especially about a worsening of the public sector borrowing in conjunction with rising oil prices, say due to geopolitical tensions; such a coincidence creates a “twin deficit”— fiscal and current
account deficits.”
On the other hand, Das reasoned that PSUs with own revenue streams can service debt and take care of their liabilities and hence such borrowings should be viewed differently.
Economy losing traction
The economy was clearly losing traction and needs a decisive monetary policy to promote growth, said RBI Guv Shaktikanta Das. The MPC agreed to cut key policy rates by 25 bps early this month. Of the 50 bps policy cut in February and April, banks reduced rates on fresh rupee loans by 21 bps, while the weighted average lending rate on outstanding loans rise by 4 bps
Risks remain
RBI Deputy Governor Viral Acharya said the mixed picture on economic growth has morphed into one where at least some aspects have weakened considerably over the past two quarters. He also flagged some upside risks, including deficiency in monsoon and volatality in crude oil prices, to inflation. However, monetary transmission will trickle down by next year