Patel counsels Govt to reduce borrowing
RBI guv strikes a cautious note
In his first public advice after maintaining a low profile since taking over in September, Reserve Bank of India (RBI) governor Urjit Patel on Wednesday asked the government to reduce the level of borrowings both at Centre and states. The counsel comes three weeks before the presentation of Budget by finance minister Arun Jaitley on February 1.
Stating that debt to gross domestic product (GDP) ratio was constraining the country’s sovereign ratings, he said: “Since 2013 the central government has successfully embarked on a fiscal consolidation path. Even then, our general government deficit (that is borrowing by Centre and states combined) is, according to IMF data, amongst the highest in the 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, this assumes more importance.”
The government had been attempting to get India’s credit rating upgraded. International rating agencies such as Moody’s and S&P have refused to upgrade India’s rankings due to high debt to GDP ratio, though overall macro-economic situation has improved.
While Moody’s Investors Se­r­vice rates India at ‘Baa3’, the lowest investment-grade rating, but with a ‘positive’ outlook, S&P rates India at ‘BBB minus’ with a ‘stable’ outlook. The government had set a fiscal deficit target of 3.5 per cent of the gross domestic product (GDP) in 2016-17.
Anubhuti Sahay, head (So­uth Asia economic rese­arch) at Standard Chartered Bank (India), said, “Our base case is that the government will stick to 3 per cent fiscal deficit target in FY18. That said, we cannot rule out a higher target of, say, 3.3 per cent at this stage – particularly as the NK Singh panel report assessing the fiscal consolation path is likely to be released closer to the budget date. Our analysis shows that the government could target 3 per cent of GDP without factoring in any windfall gains (resulting from demonetisation thro­u­gh RBI dividends transfers) and assuming a neutral imp­act on the deficit from GST.”
Speaking at the Vibrant Gujarat summit, Patel also said India needed to ensure its medium-term consumer price-based inflation target of 4 per cent is “secured on a durable basis given the progress already made.”
The Reserve Bank of India chief said the gain on reducing inflation has been, in no small part, due to supportive policies of the government, especially the proactive management of the food economy since 2014.”
Prabhudatta Mishra