Rajan maintains status quo on rates, throws ball back into govt’s court
RBI governor Raghuram Rajan played along expected lines on Tuesday by maintaining a status quo on interest rates.union budget Updated: Feb 16, 2016 15:49 IST
RBI governor Raghuram Rajan played along expected lines on Tuesday by maintaining a status quo on interest rates. He has now passed the ball into the government’s court by mentioning that any further action on interest rates will need to be based on inflation trends derived from the food prices trajectory and from the impact of the 7th Central Pay Commission which has recommended wage hikes.
This will be clear from the government’s plan in the forthcoming Union Budget on February 29. Since the recommended salary hike is an expenditure, it has already prompted the government to revise its fiscal deficit to 3.9% of GDP. But most observers say the target will be at 3.5%, which will be difficult to reach.
In the upcoming budget, the government has to balance by keeping up the capital spending to encourage investment revival while also ensuring it gets adequate funding in place to meet the pay commission obligations. This is needed to stay on the course of fiscal consolidation.
In its sixth bi-monthly monetary policy review, RBI specifically said that it would look for steps on investments, training, and skill development that could help lower the pace of inflation. The RBI has also pointed out the need for revival of stalled projects that showed an increase to Rs 10.7 lakh crore as of end-December as compared with Rs 10.5 lakh crore as of end-September, according to Centre for Monitoring Indian Economy (CMIE) data.
Experts suggest the government is looking at innovative ways to balance the budget and yet draw revenues, which means monetizing the assets they have, such as the disinvestment programme, land holdings, other physical assets and so on and how they can bring back private sector investments.
The government will have to find ways to build revenues that can absorb the fiscal drain on account of the higher wage bill. Additionally, if oil remains at the current low levels and there is good monsoon next year, this will keep inflation in check and prompt Rajan to support growth with a rate cut.
Finance minister Arun Jaitley has estimated the additional cost to the exchequer in the first year for the implementation of commission’s recommendation to be Rs 70,000 crore. From April, it will increase the country’s total annual pay bill about Rs 1.02 lakh crore, lasting over two to three years.
Depsite the huge outlay, the finance minister has so far been optimistic to not let the strain impact the fiscal target.