‘RBI rate cuts depend also on inflation’

With the fiscal worry out of the way, the ball is now in RBI’s court. Speaking to Bloomberg TV India , former RBI Governor C Rangarajan opines that inflation has to remain at the same level or slide lower to prompt RBI to cut rates. While lauding the Budget focus on reviving rural demand, the former chairman of the Prime Minister’s Economic Advisory Council said the government must focus on outcomes.

I want to get your comment on the fiscal consolidation path. The government is also going to review the entire FRBM framework. What do you make of all the discussion?

I think the Finance Minister has done the right thing. The adherence to the roadmap for the fiscal consolidation is extremely important. For sustaining high growth, macroeconomic stability is important and one of the elements or dimensions of macroeconomic stability is fiscal consolidation. That is why I am happy the Finance Minister stuck to the target and has fixed the fiscal deficit to 3.5 per cent of the GDP for FY17. I think the question that arises is whether the projections, in terms of revenue and expenditure, would give him the level of fiscal deficit he has promised. There are concerns about the extent of impact of the 7th Pay Commission being fully reflected in the expenditure estimate. It appears as if it is not being fully taken into account, in which case it will make it difficult to maintain the fiscal deficit at 3.5 per cent. You will have to think of raising the revenues a little further to ensure adherence to the 3.5 per cent target.

The commentary on rural India was overwhelmingly high in the Budget. Do you think the the various measures and schemes, new and old, are enough to revive rural demand, and do you think there is a concern that inflation may flare up?

No, I do not think so. The push for rural India and promote agriculture is a good thing. In fact, one hopes that after two years of drought we will have better monsoon this year so that agriculture output picks up again. In fact, I believe that the food inflation will get further moderated if agriculture output picks up and if rural demand picks up; it will be good for the urban areas and the manufacturing sector also. But the whole issue here really is not the question of increasing public expenditure, but ensuring that the expenditure is actually incurred and real assets are created and real impact is there. One can always talk in terms of increasing public spending, but the problem is always been that the focus is on outlays rather than on outcome. I think when a big push is planned in the rural areas, greater care is also required to ensure that the goals set out in the various schemes are achieved.

Is the stage now set for a rate cut?

Well, that depends upon how inflation behaves. The commitment and the adherence to the fiscal consolidation path helps; but what the RBI will do in terms of rate cuts also depend upon how inflation behaves. That is the primary indicator they look at. Therefore, one has to watch out for factors that may have an impact on the inflation. But if the inflation continues to remain at the same level or a little lower, then there is a good scope for rate cuts.

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