The Centre has twice revised its borrowings target in the H2 of FY11-12, leading to over Rs92,000 crore of excess borrowings over and above the budgeted Rs4.2 lakh crore, which has put a severe strain on the budgeted fiscal deficit estimate of 4.6%
Mumbai: Flagging the issue of growing fiscal deficit, the Reserve Bank of India (RBI) on Monday termed as ‘worrisome’ higher dependence on market borrowings by the government and called for fiscal prudence, reports PTI.
“Tighter adherence to fiscal rules (is) necessary as increasing dependence on market borrowings is worrisome,” the RBI said in its macro-economic and monetary developments review released on the eve of monetary policy announcement.
The Centre has twice revised its borrowings target in the H2 of FY11-12, leading to over Rs92,000 crore of excess borrowings over and above the budgeted Rs4.2 lakh crore.
This has put a severe strain on the budgeted fiscal deficit estimate of 4.6% with even the finance minister admitting that meeting the target will be difficult.
The RBI said the government has been borrowing from the open market through Ways and Means Advances due to lesser accumulation in the National Small Savings Fund.
The increased government borrowing, along with rate hikes, has had an impact on liquidity conditions and the apex bank said it had to resort to buy back of Rs61,400 crore of government securities in what it terms as open market operations (OMO) to inject liquidity in the system.
The RBI also made it clear that though the OMO is the instrument of choice, it can resort to adopting other measures to infuse liquidity “as and when required”.
“Growth in 2011-12 is moderating more than what was expected earlier. The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13,” the RBI said
Mumbai: Amid concerns over gross domestic product (GDP) expansion, a survey of professional forecasters by the Reserve Bank of India (RBI) has projected that growth will slow down to 7% in FY11-12 and will pick up only marginally at 7.3% next fiscal, reports PTI.
The downward revision of the projection to 7% is startling, as a similar survey three months back had pegged the median forecast for growth at 7.6% in FY11-12 and at 7.7% in FY12-13.
“Growth in 2011-12 is moderating more than what was expected earlier. The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13,” a statement from the RBI said.
The RBI pointed out that the manufacturing sector’s reliance on global demand, investment uncertainty and high interest rates were denting the growth.
Volatility in the exchange rates, which affects fund flows and company bottomlines, is a challenge as the country enter the next fiscal, the RBI said, noting there were some positives in the resolution of structural issues faced by the economy.
On inflation, which has been above the comfort level—prompting prompted 13 consecutive rate hikes by the Reserve Bank from March 2010 till October last year—the survey said average Wholesale Price Index (WPI) inflation for the whole fiscal will be 8.8%.
The RBI has given a guidance that WPI inflation, which stood at 7.5% in December 2011, will cool down to 7% by March 2012.
In its Macroeconomic and Monetary Policy Developments report released ahead of the policy review on Tuesday, the RBI said the sentiment of the industry also remains weak.
“Weakening demand, increased global uncertainties, lower availability of credit and higher input costs are seen to be the significant factors affecting the overall business sentiment,” it said.
Unless fiscal reforms are expedited, the Centre could miss the rolling target of fiscal deficit at 4.1% of the GDP for 2012-13 as set out in 2011-12 Budget, the RBI said in a macro-economic review of the economy
Mumbai: The Reserve Bank of India (RBI) on Monday pitched for expediting economic reforms including reduction of subsidy and implementation of the Direct Taxes Code (DTC) and Goods and Services Tax (GST) to contain the fiscal deficit which is expected to exceed the Budget estimate, reports PTI.
“Prospectively, improvement in fiscal situation in 2012-13 is not only contingent upon the growth performance but also on the progress in implementation of tax and expenditure reforms,” RBI said in a macro-economic review of the economy ahead of third quarter review of monetary policy.
Unless fiscal reforms are expedited, the Centre could miss the rolling target of fiscal deficit at 4.1% of the gross domestic product (GDP) for 2012-13 as set out in 2011-12 Budget, it said.
On the expenditure front, it said, the government needs to move towards deregulation of pricing of diesel for controlling its expenditure on petroleum subsidies.
It also said, “A delay in enactment of the DTC Bill (presently under consideration of the Standing Committee on Finance) may affect its scheduled introduction from 1 April 2012”.
It is expected that DTC system would improve compliance levels as rates of corporation tax and surcharge are reduced and tax base is widened, it said.
In respect of GST, it said, while the Bill to amend the Constitution for introducing this tax was tabled in March 2011, the draft GST legislation requires consensus on a number of issues involving both the Centre as well as state governments.
RBI also noted that the larger fiscal spending could further affect growth in the economy amidst a widening current account deficit.
There is need for cutting government’s consumption expenditure and stepping up its capital spending in order to lift both the current and future growth. This will help the economy to get back to higher potential growth that it had realised in the pre-crisis period, it said.
It is estimated that the higher expenditure on petroleum subsidy could drive up the fiscal deficit by around 0.8 percentage points of GDP for 2011-12, RBI said.
The government pegged the fiscal deficit target at 4.6% for the current fiscal.
The government will face additional pressures on account of food subsidies when the proposed Food Security Bill is enacted and implemented, it said, adding, the government needs to control its expenditure on petroleum subsidies.
Subsidies and the resultant higher fiscal deficit may help in keeping inflation suppressed in near term, but over time the impact of higher subsidy induced deficit would exert pressure on the inflation path, it said.
The RBI report said decline of growth to below potential is expected to ease pressures on aggregate demand and thereby have a softening impact on generalised inflation.
Apart from this, declining international commodity prices has also emerged as a favourable factor, it said.
However, the pass-through of rupee depreciation and expansionary fiscal policy have emerged as major risks, offsetting the favourable impact from the lower demand pressures and commodity prices, RBI said.
The suppressed inflation from energy prices further complicates policy options as revisions in these prices could be inevitable, it added.
Wage inflation is still high in rural areas and real wages increased, though at a slower pace than previous year, it said.
Overall, the emerging trend in inflation so far is broadly in line with the projected path towards 7% by March 2012. The risks to softening of inflationary pressures, however, remain, it said.