FM's FISCAL PLAN - MAIN PLAN TO GET RBI TO CUT RATES?

By Ruma Dubey

Today’s Press Conference of the Finance Minister, P Chidambaram, was a damp squib. Purportedly, the meet was to chalk out the fiscal consolidation plan but it was actually more about sending out a message to the Reserve Bank of India (RBI) – something like, “as urged by you, we have done our bit to bolster the economy, now it is your turn!” The FM said that he hoped “RBI would take note of fiscal consolidation plan”. Clearly, the purpose was to put the ball in RBI’s court, indirectly asking it to cut rates when it presents the Credit Policy tomorrow and help revive growth.  Interestingly, RBI Governor, Duvvuri Subbarao, had met with Chidambaram on Friday, 26th Oct.

The great ‘fiscal consolidation plan’ was really nothing new. Chidambaram said that the Govt had no option but to go for this plan given the mounting fiscal deficit. It is good to know that realization has finally dawned!

A quick look at the great fiscal consolidation plan:

• The five-year roadmap follows the recommendation of the Vijay Kelkar Committee 
• Fiscal deficit target at 5.30% for FY13 and 3% by FY17. The fiscal deficit was 5.8 % in FY12.
• Economy will return to the path of high investment, higher growth, lower inflation and long-term sustainability.
• Government would be able to raise Rs 30,000 crore from disinvestment and Rs 40,000 crore from sale of spectrum.
• Current Account Deficit (CAD) to come down to $70.3 billion or 3.7% of GDP in the current fiscal, from $78.2 billion or 4.2% in FY12.
• CAD will be fully financed by capital inflows, substantial part of it will be in the form of FDI, FII and ECBs.
• All flagships programs designed to protect the poor will be fully protected under fiscal consolidation programs.

The roadmap looks good; all plans always look great. We Indians are indeed superlative when it comes to planning but quite questionable when it comes to implementation.

The Govt is getting overambitious when it states that it wants to reduce the fiscal deficit in the current fiscal to 5.3%. It is unlikely that it will go anywhere near this figure and would mostly likely, in the best case scenario be around 5.7 to 5.8%.

To garner more receipts the FM is banking on Rs.70,000 crore to come in from divestment of stake in PSUs (Rs.30,000 crore) and spectrum sale (Rs.40,000 crore). The aim is that if this money comes in, fiscal deficit could come down to the targeted 5.3%. Now that is idealistic. First and foremost, it needs to reduce public expenditure and nowhere in the ‘plan’ was there any talk about reducing expenses. In fact the big worry is that the money which will come in would be used to finance social programs, after all, 2014 is an election year and given the reputation and track record, naturally, it will try to win votes by spending more on social programs. So to expect that all money raised will be expended to reduce fiscal deficit is like living in an Utopian world.

The FM said that they have accepted the Kelkar Committee recommendations and the report talks about reducing subsidies but is strangely silent when it comes to other avenues, like elimination of various exemptions. It is a political hot potato and the Govt already on a weak wicket, will not attempt that. The FM and the Kelkar report is silent about effective public expenditure. Shouldn’t the Govt have the guts to review and questions the effectiveness of some of its social schemes, where money is being poured but no one, apart from a few middle men, seem to be benefitting.

Will the Govt be able to garner Rs.30,000 crore from divestments, given the fact that only five months are left for the current fiscal to get over? The basic assumption of the Govt while chalking out this plan is that it will have a good winter session and it will thus be able to get FDI through and that in turn will bolster the markets which will make it conducive for divestment. Sounds like a tall order but if it pulls off FDI, then the companies lined up for divestment are very good and maybe, it might just be able to raise the required money. But as said earlier, it is a big “if”.

FM is looking at the fiscal deficit but is the rest of UPA game, with 2014 coming, one wonders if the FM’s reiteration that his statement that there is no option but to go for this plan seems lame.

This big fiscal consolidation plan was a non-event; more of a preamble, trying to coax RBI for a rate cut showing that the Govt is finally pulling up its socks and has the will to work. Will RBI relent?