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In its first comments on the Union Budget for 2015-16, the Reserve Bank of India (RBI) gave a thumbs-up for the steps announced by the government on fiscal consolidation, with a rider that the proof of a pudding was in the eating.
It praised the Central Statistics Office (CSO) for updating the methodology in estimating Gross Domestic Product (GDP), on par with international best practices. However, RBI clearly differed with the inference drawn from the revised estimate, showing a "robust economy".
The picture it presents of a robust economy, with growth having picked up significantly over three years, is at odds with still-low direct measures of growth, RBI said.
CSO has estimated 4.9 per cent growth for 2012-13, as against 4.5 per cent by the older method. By the revised method, the economy grew 6.9 per cent in 2013-14, as against 4.7 per cent earlier.
The current reading on production, credit expansion, imports and capacity utilisation, as well as with anecdotal evidence on the state of the economic cycle, is lower than the CSO estimates. RBI said, nevertheless, the picture of a steadily recovering economy appears right.
'Well begun'
Complimenting the intent for getting the fiscal house in order, RBI said there were important and valuable structural reforms embedded in the Budget. These would help improve supply over the medium term.
In the short run, however, postponement of fiscal consolidation to the three per cent of GDP target by one year will add to aggregate demand, it said.
At a time of accelerating economic recovery, postponement of fiscal consolidation could be a source for concern for demand management, especially with large borrowings intended for public sector enterprises.
Mitigating factors
Demand management during a phase of rapid economic recovery is a challenge. This could be addressed by fiscal discipline, laced with a candid picture about the government books. RBI said the government had emphasised a desire to clean up legacy issues which gave a misleading picture of the true extent of fiscal rectitude. It has also moderated the optimism in earlier projections.
The true extent of fiscal consolidation might be higher than in the headline numbers. Also, the government is transferring a significantly larger amount to the states, without entirely devolving the responsibility for funding of central schemes. This would help to reduce the deficits in state government budgets and also a lower general fiscal deficit.
With lower international energy prices, the government has shifted focus to spending money. The thrust is on spending on infrastructure than on subsidies. The government also articulated better targeting and reduction in subsidies through direct transfer.
The government and RBI have signed a memorandum setting out clear inflation objectives for the latter. This makes explicit what was implicit before - that the government and RBI have common objectives and fiscal and monetary policy will work in a complementary way.
Performance is key
In sum, then, the government intends to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment.
Of course, all these mitigating factors have a fair component of intent. The realised net fiscal impulse will depend on both central and state government actions, RBI added.
