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  • 5 pointers from RBI releases on Budget 2016

    It is a good idea to read the Reserve Bank of India (RBI) governor’s speeches and credit policy statements ahead of the Budget. Invariably, there are suggestions hidden in them.

    Recently, the government Raghuram Rajan gave two speeches, one during the Monetary Policy review and another at the National Council of Applied Economic Research (NCAER). In both these speeches, the RBI governor spoke about key requirements for sustained growth in India. This essentially sets the tone for the upcoming Union Budget.

    Here are five things the RBI wants from Budget 2016:

  • Sustainable growth

    In his speech at NCAER, the RBI governor spoke about Brazil, whose growth story changed within years. It grew 7.6% in 2010. However, economy shrank 3.8% in 2015 and got its government debt downgraded to junk status. This is because its growth was not sustainable and it grew too fast too soon. “The 7.6% growth came on the back of substantial stimulus after the global financial crisis,” the RBI governor said in his speech at NCAER. This only caused a wide fiscal deficit and double-digit inflation without any change in the country’s fortunes. He called for India to learn from Brazil’s mistake and not grow too fast through stimulus packages.

  • Macro-economic stability

    In the past few years, India has managed to control its inflation and deficits while also ensuring a 7% growth. “But it is at such times that we should not be overambitious,” Raghuram Rajan warned. The only reason India appears to be an island of relative calm in a turbulent global economy is because of its macro-economic stability. No policy should threaten this. “Macroeconomic stability will be the platform on which we will build the growth that will sustain our country for many years to come, no matter what the world does. Indeed, I am reminded today of the period 1997-2002 when India labored and reformed with only moderate growth, only to see a decade of high growth after that,” the governor said.

  • Fiscal consolidation

    Key to macro-economic stability is fiscal consolidation – curtailing unnecessary expenditure by the government to cut down its debt. The RBI governor called for a continued fiscal consolidation measure. “The consolidated fiscal deficit of the state and centre in India is by far the largest among countries we like to compare ourselves with,” Rajan said. This is because the state government spent more than they earned. This trend is likely to continue because of the state-based power sector revival project UDAY. This puts greater pressure on the central government to control its fiscal deficit. Otherwise, government bond yields will rise, he warned. This would only make it costlier for the government to borrow from the market. Higher interest rates would also make it difficult for the RBI to cut interest rates. It may even fuel inflation

  • Cleaning up banks

    “One very important contributor to macroeconomic stability is healthy banks. Banks in India have a number of stressed loans on their balance sheet,” the RBI governor said. Such loans can be restructured. This increases the possibility that the project (for which the money was lent) could be revived or even be successful. However, for this to happen, the bank must classify it as Non-Performing Asset (NPA) first. “(This is) a label banks are eager to avoid,” Rajan said. To deal with this problem, the RBI is working along with the government. In addition, the banks need capital infusion from the government.

  • Financial Inclusion

    Sustainable growth needs financial inclusion – growth in all sections of the population. The government has announced some measures for this like the Jan Dhan Yojana. However, the governor worries that these measures are increasing people’s ability to borrow money without teaching them how to manage money. “By drawing them into the formal system through savings and payments first, then insurance, we get them accustomed to managing money before tempting them with credit,” Raghuram Rajan suggested.

    • You can read the speech here Read more

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  • 7.2%

    In the past few years, the government has managed to cut down its fiscal deficit from 5% levels to 4.1%. Fiscal deficit is when the government overspends its revenue and borrows from the market. It is measured as a percentage of the Gross Domestic Product (GDP), which represents the economy size. However, India’s consolidated fiscal deficit actually rose to 7.2% in 2015 from 7% in the previous year. This takes into account deficits by both the central and state governments.