RBI reiterates need for fiscal discipline to boost growth

Fiscal consolidation is key to boosting India's GDP growth and containing inflation, Subir Gokarn, the deputy governor of the Reserve Bank of India (RBI) Dr. Subir Gokarn said on Monday. "We can’t discount the importance of fiscal consolidation contributing to growth. It is not that growth first and then we get fiscal consolidation. They are interrelated," Dr. Gokarn said in New Delhi today. He said that reining in fiscal deficit was doable. India's fiscal deficit during April to December 2011 touched 92.3% of the Government's estimate for the full fiscal year, reinforcing growing fears that the March-end figure will be much higher than the annual projection. The shortfall in the Government's budget stood at Rs. 3.81 trillion, the Controller General of Accounts (CGA) said on its website today. The fiscal deficit was 44.9% of the annual goal in the first nine months of FY11. In February 2011, the Government had budgeted a fiscal deficit of 4.6% of GDP for the fiscal year 2011-12, but many economists see the deficit overshooting by a wide margin due to slowing growth and increased spending. Finance Minister Pranab Mukherjee has himself said that cutting the budget deficit in FY12 will be a serious challenge. Slowing economic growth has hurt tax receipts even as subsidies ballooned and the Government struggled to sell stakes in state-run companies in a falling market. The RBI Governor, Dr. D. Subbarao had also urged the Government to put a cap on the public debt as it would hurt growth. Gokarn today also stressed on the need for raising the productivity of protein-based food items which had witnessed a sharp increase in the recent times. "Drivers of food inflation are really supply demand imbalance. There has been a shift of demand towards protein-based items. We ought to raise the productivity of protein items", he said at an Investor Conference. In its policy statement of January 24, the RBI Governor took a small step towards loosening the monetary policy by cutting the cash reserve ratio (CRR) by 50 basis points to 5.5%. However, he kept the repo rate, at which the RBI lends to banks, unchanged at 8.5%. The reduction in the CRR freed up an additional Rs. 320bn for circulation and thereby eased pressure on the upward movement in bank interest rates. The RBI's latest policy statement lowered the central bank's GDP growth forecast for FY12 to 7% from 7.6%.