Straying from fiscal consolidation and easing up on the fight against inflation would jeopardise the country's economic stability at a time of global market turmoil, Reserve Bank of India Governor Raghuram Rajan has warned.
The blunt words, in a speech to a research body in New Delhi, come as the government is looking at proposals to widen its budget deficit targets to steer more spending into infrastructure, while government officials have called on the central bank to cut rates further to help boost the economy.
But Rajan said on Friday loosening its focus on inflation or the fiscal deficit risked pushing India onto a path similar to Brazil's, saying the South American country passed big stimulus measures and cut interest rates aggressively, but is now suffering from the hangover of those policies.
It would also risk pushing India into a similar situation as 2013 when the country suffered its worst crisis in more than two decades, and dent its appeal at a time when the rest of the so-called BRIC economies are struggling, Rajan added.
"It is at such times that we should not be overambitious," Rajan said.
"We should be very careful about jeopardizing our single most important strength during this period of global turmoil - macroeconomic stability."
Debt LevelsRajan emphasized the need to stick to fiscal consolidation, noting recent power industry reforms passed by Prime Minister Narendra Modi's government could force state governments to absorb 75 per cent of the 4.3 trillion rupees held by its utilities, and could inflate the country's debt levels.
Rajan said that consolidated fiscal deficit of the Centre and states rose to 7.2 per cent in 2015 from 7 per cent in the previous year.
"So we actually expanded the aggregate deficit in the last calendar year. With UDAY, the scheme to revive state power distribution companies, coming into operation in the next fiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on the centre to adjust more," he said.
The Modi government had last year deviated from the fiscal consolidation path, postponing reduction in fiscal deficit target by a year.
Originally, the target was to bring down fiscal deficit to 3.6 per cent of the GDP in 2015-16 but it has been postponed by a year. Now, government is targeting 3.9 per cent in the current fiscal.
New Delhi is believed to be considering widening its fiscal deficit targets when it unveils its annual budget next month, government officials have said. Analysts have said markets will forgive small adjustments as long as the spending is accompanied by other measures such as reducing subsidies.
Rajan also warned about the dangers of changing the current policy of targeting consumer inflation of 2 to 6 per cent, which the RBI formally adopted last year.
He said that fall in inflation has been on account of the "joint work of the government and the RBI, aided to some extent by the fall in international commodity prices. This is no mean achievement given two successive droughts that would have, in the past, pushed inflation into double digits".
Unfortunately, he added, despite the success on the inflation front there are voices suggesting weakening the fight against inflation.
'Policy Credibility' Recently government officials, including Modi's top economic adviser Arvind Panagariya in an interview with Reuters, have suggested a need to loosen the target.
Rajan rejected those arguments on Friday, warning that changing its target would risk undermining the RBI's "policy credibility."
"If every time there is any minor difficulty, we change the goal posts, we signal to the markets that we have no staying power. Let me therefore reiterate that we have absolutely no intent of departing from the inflation framework," he said.
Macroeconomic stability, Rajan stressed, would be the platform on which "we will build the growth that will sustain our country for many years to come, no matter what the world does".
On the interest rate, he said, both industrialists and retirees overstate their case and the way to resolve their differences is to bring CPI-based, retail inflation steadily down.
The RBI is scheduled to announce the next bi-monthly monetary policy on February 2.
Rajan also cautioned against raising tariffs to protect the domestic industries which are facing problems.
"Clearly, there are industries in trouble. We should, however, be particularly careful about raising tariffs at a time when costs are falling everywhere - aside from the inflationary impact, for every happy domestic businessman whose prices are raised by the imposition of tariffs on imports, we have an unhappy domestic businessman whose costs are raised by the very same tariffs, as well as unhappy consumers," he added.
(Agencies)
