Fiscal & monetary policies: GOI & RBI on the same page?

Fiscal and monetary policies: GOI & RBI on the same page?

M G WARRIER

Though for the outside world and media the differences of views between GOI and RBI provide entertainment stuff, all along, the two (GOI and RBI) have saved the marriage between fiscal and monetary policies by appropriate ‘give and take’ and an unwritten understanding that ‘divorce’ is not an option.

The N K Singh Committee which reviewed Fiscal Responsibility and Budget Management (FRBM) Act has submitted its report to the finance ministry. Though the budget 2017-18 being presented on February 1, 2017 may not be able to factor in the spirit of the committee’s recommendations, it is quite possible that the Economic Survey preceding the budget speech and the discussion that would succeed will take cognizance of the views expressed by the committee. The highlights of the committee’s recommendations reported in the media include:

·        Space for government to spend more on development (translated into common man’s language, this would mean rise in government borrowings),

·        A slightly higher fiscal deficit target (perhaps a band of 3 to 3,5 per cent of GDP in place of the present target of 3 per cent of GDP for FY18 (Keeping in view the leeway to spend more in 2017-18, Chief Economic Advisor is reported to have expressed his dissent on a rigid target)

·        Panel members were of the view that the report should be made public only after Budget 2017-18

Differences of views notwithstanding, the arithmetic of Budget 2017-18 will get impacted by the four-volume report now with the finance ministry.

Conflict between fiscal and monetary policies?

Reserve Bank of India Governor Urjit Patel who is a member of the Review Panel, speaking at the Vibrant Gujarat Summit on January 11, 2017, made the following observations:

 “***   *** while some government guarantees and limited subventions can help, steep interest rate subventions and large credit guarantees also impede optimal allocation of financial resources and increases moral hazard. The mandates for these have to be narrow, and thus perforce be deployed judiciously, within a regulatory framework, which RBI has suggested. Guarantees increase government’s contingent liabilities, and add to risk premia for its own borrowing. Guarantees per se at the end of the day have limited utility in solving important sector issues. For example, for small scale enterprises, perhaps non- pecuniary and transaction costs related to clearances, inspections and the taxation bureaucracy are more important *** *** our general government deficit (that is borrowing by the centre and states combined) is, according to IMF data, amongst the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade. We have to take cognisance of these comparisons and facts as we go forward to make progress. Specifically, this will help us to better manage risks for ourselves, and thereby mitigate financial volatility. In the context of an already adverse external environment that I mentioned earlier, thisassumes more importance.

Borrowing even more and pre-empting resources from future generations by governments cannot be a short cut to long-lasting

higher growth. Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front. ”

These observations of Urjit Patel coming at this juncture gains significance because a supportive fiscal policy is imperative for RBI in chasing the now ‘mandatory’ Inflation Target of 4 per cent (plus or minus 2 per cent with certain pre-decided milestones).

Though for the outside world and media the differences of views between GOI and RBI provide entertainment stuff, all along, the two (GOI and RBI) have saved the marriage between fiscal and monetary policies by appropriate ‘give and take’ and an unwritten understanding that ‘divorce’ is not an option.

Government borrowings and interest rates

US has a per capita public debt of $65,000(Total outstanding debt touching $20 trillion!) . But that country gets government bonds subscribed not just by ‘public’, but by outside world also. In India, public debt really gets subscribed by public, using the captive catchment area of SLR and funds of public sector organisations like LIC. Thus, till such time government securities really become market-friendly, whatever be the arguments in favour of increased borrowing, GOI will have to exercise caution. For the reasons stated here, as the funds mobilized by banks and financial institutions are dictated by market forces, GOI does not have much maneuverability on costs of borrowings.

Challenging job for CEA and RBI

Suffice to say, it is a tight rope walk for GOI and RBI to balance the fiscal and monetary policy compulsions from getting exposed to the influence of distrust which is slowly building up in the minds of savers of funds and users of  resources for various political and policy reasons in recent months. India’s economic growth will not depend on the prophecies of economists and analysts, but on how Urjit Patel and Arvind Subramanian handle the conflicting interests of monetary and fiscal policies during the coming weeks.

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  (M G Warrier is a Mumbai-based consultant)