MUMBAI, India (AP) — India's central bank urged the government to rein in spending in advance of important state elections, as it seeks more help from New Delhi in the fight to beat down inflation and boost a flagging economy.
"The fiscal deficit has to come down," Reserve Bank governor D. Subbarao said Tuesday.
The Reserve Bank of India predicted India's economy will expand 7 percent this fiscal year — sharply lower than its October forecast of 7.6 percent— but said it would keep interest rates unchanged until it sees a sustained drop in inflation.
Inflation has been above 9 percent for most of the last two years despite 13 interest rate hikes.
"One reason policy rate raising has not been completely effective is there was demand generated on the fiscal side," Subbarao said. "We thought monetary-fiscal coordination should be brought out into the public."
He declined to specify a deficit target, but urged New Delhi to present a credible plan for cutting costs and increasing revenue when it presents the budget in March.
"Beyond the number, there has to be some strategy backing up that number, not just for convincing the Reserve Bank of India but convincing everyone around that fiscal consolidation is credible," he said.
The bank has been under immense pressure to give a quick kick to India's economic growth — which has dropped below 7 percent for the first time in two years — by cutting interest rates.
While Subbarao said Tuesday that the bank would not hike rates further, he warned that the timing of rate cuts would hinge on policy measures to cut the fiscal deficit and encourage investment. The bank would also like New Delhi to take steps to shift spending away from government consumption to investment and accelerate policy reforms that would improve the investment climate.
In addition to stoking inflation, government borrowing is crowding out private companies from credit markets, businesses complain.
Borrowings by the central government alone have swelled to 5.1 trillion rupees ($102 billion) from the budgeted 4.2 trillion rupees ($83.4 billion) for the fiscal year, and Treasury Bill issuance, at 1.0 trillion rupees ($20 billion) is about ten times higher than budgeted, according to Reserve Bank data.
The Reserve Bank on Tuesday cut the cash reserve ratio — the percentage of cash commercial banks must keep on hand — by half a percentage point, to 5.5 percent. That should add 320 billion rupees ($6.4 billion) to India's cash-strapped banking system.
Subbarao joins a chorus of economists calling for prudence as the ruling Congress Party continues to hand out lavish subsidies for food, fuel, coal and fertilizer and expands entitlement spending. The government is preparing to unfurl a pricey food security program on the heels of its massive right to work program.
"What seems to be worrying them is lack of effort by the government to bring down the fiscal deficit," said Nomura India economist Sonal Varma. "It's countering the tightening impact monetary policy is trying to achieve. There is no complementarity between monetary and fiscal policy."
She said the central government's fiscal deficit is likely to be 5.7 percent of GDP this fiscal year, far higher than its 4.6 percent target.
Finance minister Pranab Mukherjee told the Press Trust of India that the government is working to bring down inflation.
"We want to reduce it by adjusting the fiscal policy, which I am doing," he said. "I shall (disclose) the essential features in the budget."
Balancing India's budget is no easy task. Subsidies and entitlement programs are politically expedient in a nation where some 800 million people live on less than $2 a day, and, as Subbarao acknowledged, most spending is on nondiscretionary items like pensions, salaries and interest payments.
On the revenue side, raising taxes is controversial, given already high inflation and slow growth, and faced with poor market conditions, New Delhi's plans to sell big stakes in state-run companies have not been realized.
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