RBI opposes FRBM target relief

The finance ministry has found support from the central bank in its opposition to any populist move for dilution of the restrictions that the Fiscal Responsibility and Budget Management Act, 2004 imposes on government spending and fiscal profligacy.

The Planning Commission has suggested moving the goalposts by two years, a proposition that has not gone down well with North Block as well.

Questioning the suggestion, the Reserve Bank of India has said the move will have macroeconomic and budgetary implications, besides impacting the government's credibility.

"In the present milieu, adhering to FRBM targets in respect of fiscal and revenue deficit is critical. Fiscal discipline remains the major factor in determining the investment grade rating of the Indian economy by various international agencies," it said.

In its comments on the Eleventh Plan approach paper, the RBI has also pointed out that the huge fiscal deficit has resulted in accumulation of outstanding debt which is substantially high by international standards.

"Further, use of borrowed resources for meeting current expenditure requirements has resulted in widening of asset-liability mismatches," it says.

RBI has said once the fiscal deficit stabilises at a neutral level, alternate deficit indicators could be targeted. It has also underscored the need to eliminate revenue deficit and generate sufficient revenue surplus for asset creation.

The Centre's outstanding debt "" of more than 62 per cent of the GDP as of March end this year "" is quite high. The debt-GDP ratio for the Centre and states together also stood at around 80 per cent in 2005-06. In such circumstances, any increase in fiscal deficit will have repercussions on inflation and interest rates, the note adds.

"The increase in international oil prices might also generate macroeconomic imbalances. The difference between the Centre's liabilities and assets increased to 27.6 per cent of the GDP in 2006-07, from 13.7 per cent in 1990-91," it adds.