The Reserve Bank of India (RBI) has scope to further cut interest rates in a bid to revive demand, former RBI Governor C Rangarajan said On Wednesday.
“I believe there is still scope to reduce interest rates,” Rangarajan said during a discussion on the Interim Budget in Rajya Sabha.
Monetary as well as fiscal steps are needed to spur demand in the economy, said Rangarajan, who is also former chairman of the Prime Minister’s Economic Advisory Council.
“We need to gear up monetary and fiscal policy to maintain demand,” he said.
Since October, RBI has slashed the short-term benchmark repo rate 350 basis points, reverse repo rate 200 bps, and banks’ cash reserve ratio 400 bps to pump in liquidity and help facilitate credit flow.
As part of the government’s latest round of fiscal measures, Finance Minister Pranab Mukherjee on Tuesday announced cuts in excise and service tax by 2 per cent each.
Rangarajan said the government’s high fiscal deficit was ‘justified’ in the current context given the global economic turmoil, but was unsustainable n the long run.
“Fiscal deficit of 6 per cent for the Centre and states taken together is a reasonable level to maintain. The world is passing through a difficult time. In a difficult situation, this level of fiscal deficit may be justified but it is unsustainable over a period of time.”
Mukherjee pegged the central government’s fiscal deficit in 2009-10 (April-March) at Rs 3.328 lakh crore, or 5.5 per cent of the gross domestic product in the Interim Budget tabled in Parliament last week.
The fiscal deficit for the current financial year has been revised to Rs 2.4 lakh crore, or 4.4 per cent of GDP, compared with the original estimate of Rs 1.332 lakh crore or 2.5 per cent of GDP.
The government’s April-December fiscal deficit at Rs 2.182 lakh crore accounted for 4 per cent of the country’s gross domestic product for the entire year.
Rangarajan said the government needs to bring down the fiscal deficit once the economy shows sign of recovery.
“We must try to bring down the fiscal deficit. On one hand, it has a stimulating impact, but it also has a dangerous impact.”
He said the Indian economy is expected to grow at 6.5 per cent during 2009-10, similar to the growth rate seen in the second half of the current financial year that ends March 31.
Referring to higher central government borrowing, Rangarajan said it would put pressure on interest rates.
“Borrowing in the current year 2008-09 (Apr-Mar) will be two and a half times higher than the original estimates. When government borrowing keeps increasing, it will put pressure on interest rates,” he said.
The government has revised its borrowing plan thrice in the current financial year.
In the Interim Budget, the finance minister estimated the gross borrowing at Rs 3.06 lakh crore, and the net borrowing at Rs 2.62 lakh crore.
