After Raghuram Rajan's policy, getting budget math right will be a lot tougher for Arun Jaitley

RBI policy statement is a direct message to Arun Jaitely

Dinesh Unnikrishnan|Feb 03, 2016, 11:16:06 IST

On Tuesday, the Rajan of Mint street sent a to-do list to the North Block, without leaving any room for ambiguity to the latter on the crucial tasks to be achieved, essential to get the economy back on the high-growth orbit.Reserve Bank of India (RBI) governor Raghuram Rajan wants finance minister Arun Jaitley to get his fiscal arithmetic precise in the forthcoming 2016 Union Budget, slated for 29 February, mooting credible steps to fast-track 'structural reforms', continuing with the public spending and honouring the fiscal consolidation path.[caption id="attachment_2608592" align="alignleft" width="380"]

RBI governor Raghuram Rajan[/caption]If Jaitley manages to take Rajan into confidence with a good budget 'package' — something that absorbs the fiscal shock on account of a higher wage bill — and if oil remains where it is and monsoon favour, Rajan would deliver the next rate cut, else will remain on hold. That's the short message from the sixth bi-monthly monetary policy.The big take away from the monetary policy, a non-event otherwise, is the emphasis central bank has attached on growth-oriented structural reforms from the Narendra Modi-government. It has warned the government not to pin hopes solely on the monetary policy to work wonders for Asia’s third largest economy.So far, the Modi government hasn’t managed to pull off large ticket reforms such as passage of GST even though it has introduced a slew of incremental reform steps.Following are the key messages from Rajan to Jaitley:For one, Rajan wants Jaitley to list out measures in the budget to revive the growth drivers in the economy. “Underlying growth drivers need to be rekindled to place the economy durably on a higher growth trajectory. The revival of private investment, in particular has a crucial role, especially as the climate for business improves and fiscal policy continues to consolidate,” Rajan said.As Firstpost has highlighted in the past, rate cuts have hardly contributed to high growth so far as banks have been reluctant to cut their rates.Despite a 125 bps rate cut by the RBI since January, banks have passed on only less than half of this headroom to the end borrower, resulting in higher cost of bank money. The RBI, arguably, has failed to force banks to make monetary transmission effective in the banking system, despite the liquidity remaining tight.Secondly, there is clear warning to Jaitley on the persisting stress on the ground and the reversal in the larger trend of stalled projects, even though the RBI expects growth to happen shouldered by lower input costs, improving real incomes of households (as inflation declines) and expected normal monsoon after two consecutive seasons of failed monsoons that hit the farm sector hard.Citing the data from the Centre for Monitoring Indian Economy (CMIE) Rajan has worried on the increase in the stalled projects in recent quarters. According to the CMIE data, the chunk of stalled projects increase to Rs 10.7 lakh crore as of end-December as compared with Rs 10.5 lakh crore as of end-September.

Another set of data from CMIE said fresh investments in projects fell 74 percent in the December quarter to Rs 1.05 lakh crore from Rs 4.06 lakh crore in the corresponding period last year, putting the onus on the government to keep pumping in money to maintain the growth momentum. “Public spending is important,” Rajan said.

Thirdly, even while acknowledging that public spending is important, the RBI warns the government on the need to stick to the fiscal consolidation path, making Jaitley’s budget arithmetic a lot more complex. “The Indian economy is currently being viewwed as a beacon of stability because of the steady disinflation, a modest current account deficit and the commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened,” Rajan said.The government, which is running on a delayed fiscal consolidation path, wants to bring down country’s fiscal deficit to 3.9 percent in the current fiscal year and the further to 3.5 percent in 2016-17 and 3 per cent by fiscal year 2018.For Jaitley, meeting the fiscal deficit targets will be a tough task on account of higher spending on account of 7th Pay Commission payout in 2016-17 (which will put an additional burden of Rs 1.02 lakh crore on the government’s finances). Also, the government hasn’t managed to progress much on the disinvestment programme (it has raised Rs 12,700 crore in the current fiscal as against a target of Rs 70,000 crore).There aren’t many options for Jaitley to meet the fiscal deficit target under check. Jaitley will need to either aggressively cut down public expenditure (which isn’t good for a struggling economy) or increase resources by increasing taxes on individual segments and pushing divestments. Rajan will keenly look at how wisely Jaitley does his fiscal math.In the presser that followed the monetary policy, Rajan didn’t specifically answer to a question on what is the fiscal deficit number he is looking for from the budget. “The budget has to be viewed as a package. It’s hard to say this number (is what the RBI is watching for),” Rajan said.But, the monetary policy statement makes it crystal clear what Rajan wants from Jaitley to effect further rate cuts. “Structural reforms in the forthcoming union budget that boosts growth while controlling spending will create more space for monetary policy to support growth.” That’s a direct message to Jaitley.Data support by Kishor Kadam

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