In an apparent attempt to make the goalposts appear credible to the central bank, Chidambaram also promised to amend the Fiscal Responsibility and Budget Management Act to make the targets inviolate. “Whatever corrections has to be made to the act will be done,” he said at a news conference after announcing a five-year fiscal roadmap and consolidation plan.
The government has been pushing the RBI to cut interest rates which it believes will boost growth as banks will find more room to lend. But the bank has been stressing that the government needs to do more on the fiscal side and pull back inflation before it can ease rates. However, the RBI, which had cut rates by 50 basis points in April, sounded cautiously optimistic on the eve of its policy statement.
“Policy actions announced by the government since September 2012 should be seen as major initiatives...As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond to growth concerns,” the RBI said in its macro-economic and monetary development review for the July-September quarter.
Chidambaram, however, declined to qualify his announcement as something the RBI should follow through. “I am making the statement so that everybody in India acknowledges the steps which we are taking. And also acknowledge the government is determined to bring about fiscal consolidation. I sincerely hope that everybody will read the statement and take note of that,” he said.
Finance ministry officials are also expected to next week meet officials from the IMF who are in the country as part of their bi-annual consultations with member countries to check on their fiscal health, officials said.
The stock and forex markets did not respond positively to the announcement and ended the day flat. The bellwether Sensex closed with a gain of just 0.06 per cent while the rupee fell by 52 paise to 54.08 to a dollar.
Chidambaram’s fiscal roadmap, co-terminus with the 12th Five Year Plan, is slightly less ambitious than that of the Vijay Kelkar report on government finances submitted to the finance minister in September. The finance ministry target is to cut down the fiscal deficit by 0.6 per cent every year starting 2012-13 to eventually bring it down to 3 per cent by 2016-17.
“This plan is necessary and must be implemented. The government is very serious about fiscal consolidation...we don’t have an option but to implement it,” the minister stressed. He, however, did not say when the necessary amendments to the Fiscal Responsibility and Budget Management Act would be made to reflect the revised deficit targets.
Analyst response was mixed. While investment bank Nomura said “the measures announced will be insufficient to contain the fiscal deficit at 5.3 percent of GDP”, Sajjid Chinoy, India economist with JP Morgan, differed saying the finance ministry has definitely created an expectation around the rates.