RBI rate cut: Urjit Patel warns of adverse impact of fiscal slippages on inflation – The Economic Times–05.10.2017

The central bank governor cautioned the government about fiscal slippages, which Urjit Patel said could weaken economic stability with the level of combined state as well as central deficit already at around 6% of GDP. The gap, the Reserve Bank of India said, could go up by another percentage point this fiscal year.

“The state and central government’s accounts combined, given that is already in the region of 6% of GDP, the national fiscal stance can hardly be discussed as tight,” Patel said at the post monetary policy media conference on Wednesday. “In other words, we should be very cautious lest fiscal actions undercut economic stability.”

Slowing economic growth could have some adverse impact on tax revenue, according to the Reserve Bank of India’s latest policy report. “The central government’s fiscal deficit could potentially widen on account of these factors. Taking these developments into considerations, the combined (centre plus states) fiscal deficit to GDP ratio may increase by around 100 bps in 2017-18.” Assuming that the central government’s fiscal deficit/GDP ratio widens by 50 bps in 2017-18, inflation could be around 25 bps above the baseline, the report added.

The governor, in his monetary policy statement, said implementation of farm loan waivers by states may undermine the quality of public spending, thereby exerting pressure on prices. His statement assumes significance amid talks that the government may consider a fiscal stimulus package for the slowing economy.

Five states — Maharashtra, Uttar Pradesh, Punjab, Karnataka and Rajasthan — have announced farm loan waivers so far in 2017-18. Uttar Pradesh and Punjab have made provisions for the likely increase in expenditure in their budgets for 2017-18. “If all affected states also announce farm loan waivers the way Uttar Pradesh, Maharashtra, Karnataka and Punjab did, then the total cost on the exchequer could be up to Rs 2.5 lakh crore, or 0.5% of GDP,” estimates ratings firm Crisil.

via RBI rate cut: Urjit Patel warns of adverse impact of fiscal slippages on inflation – The Economic Times

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