RBI MONETARY POLICY - RBI Sees Challenges Ahead in

Meeting Fiscal Deficit Target

Mumbai Our Bureau
December 3 2014
Feels stronger fiscal position may take a while, but outlook may brighten on crude price
fall
The Reserve Bank of India (RBI) is still not convinced that government finances are strong
enough for monetary easing, despite a series of corrective fiscal measures taken by it. Defending
its decision to hold key policy rates, the central bank said that it might be still a long way for a
stronger fiscal position. There is still some uncertainty about (among others) the success of
the governments efforts to hit deficit targets, the RBI said in its monetary policy statement on
Tuesday. Budget deficit in the first half of the fiscal has reached 90% of the target set for the full
year, as revenue growth remained muted. Looking ahead, the governments 4.1% target for
FY15 appears challenging, Citigroup economist Rohini Malkani wrote in a note to cli ents. Fiscal
consolidation over the longer term (3% by fiscal 2017) could only be achieved with structural
fiscal reforms, such as implementation of goods and services tax (GST), targeted cash transfers
and expenditure rationalisation, Citi said. For example, the recent fuel price reforms and lower
crude prices are likely to reduce fiscal deficit by 0.5% of gross domestic product (GDP). The
central bank expects the fiscal outlook to brighten due to the fall in crude oil prices. But, weak tax
revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely
achievement of the fiscal targets.
The government, however, appears determined to stay on course, said the policy statement.
The government has announced a series of measures to strengthen its finances. The recent
steps on expenditure compression include lifting of government control on diesel price and
austerity measures (a 10% cut in non-plan expenditure). Besides, it also announced an excise
duty hike on diesel and petrol on Tuesday, the second time in three weeks. The latest numbers,
however, do not show much improvement. Gross tax collections were up 5.9% during AprilOctober 2014, compared with the budgeted growth rate of 17.7%. The government has
contained expenditure by limiting plan expenditure (-0.4%) compared with the Budget estimate of
20.9%. Fiscal deficit during April-October 2014 amounted to about .
`4.76 lakh crore or 90% of the Budget estimate for the fiscal.
This compares with the five-year average of 74% for the same period.