RBI flags delay in fiscal consolidation

The Reserve Bank today flagged risks from the government decision to delay fiscal consolidation plan, warning that "significant deviations" and slippages will make meeting inflation targets "challenging".
Having a fiscal stance that is conducive to achieving the 4 per cent inflation target is important, it said.
"Significant and postponed deviations from them (fiscal targets) would make matters more challenging going forward," Governor Urjit Patel said.
He was replying to a query on the assumption of getting the fiscal deficit down to 3 per cent by 2019, which a committee on inflation targeting chaired by him had done, and if the current stance impinges RBI's contracted goal to get inflation down to 4 per cent in the medium term.

Patel said fiscal deficit has been on a "downward trajectory" since 2014, after the report was written and added that the monetary policy has become more flexible since then.
"The monetary policy has become more flexible in terms of responding to the inflation risks so it is not necessary that a 3 per cent target should be achievable by the time that the report said," he said.

The Governor was, however, quick to add that "having a fiscal stance that is conducive to achieving the 4 per cent target" on inflation.
Replying to a separate question of hardening bond yields, Patel elaborated that the risk from fiscal deficit is emanating from three different aspects.

First is the fiscal deficit for the current fiscal, where the Government has gone for a slippage to 3.5 per cent as against a targeted 3.2 per cent, he said.
The second factor is the fiscal deficit target for next year, where the Government has settled for a 3.2 per cent gap target as against the earlier 3 per cent.
And the third important point is a broad one about "postponement of the medium term adjustment", wherein achievement of the 3 per cent fiscal deficit number will now happen only in FY2020-21, three years behind schedule, Patel pointed out.
The Monetary Policy Committee's resolutions said the fiscal slippage could "impinge on the inflation outlook".

"Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation," it said.
Fiscal deficit is one of the most important numbers tracked by all analysts while taking a view on the strength of the macroeconomic conditions as it has an immediate bearing on inflation.
It is tracked closely by the rating agencies and deviations can also result in the cost of borrowing for the country going up in case of adverse actions on the sovereign ratings.
"The deterioration in public finances risks crowding out of private financing and investment. The MPC is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management," said the MPC resolution .