Business
Historic government-RBI agreement on inflation control
New Delhi, March 2
As per the government's
monetary policy framework agreement with the Reserve Bank of India
published on Monday, the RBI will aim to bring retail inflation below 6
percent by January 2016, and to around four percent by fiscal 2016-17.
"The
Reserve Bank will aim to bring inflation below 6 percent by January
2016. The target of financial year 2016-17 and all subsequent years
shall be four per cent with a band of (+/-) 2 per cent," says the
agreement published by the finance ministry.
Presenting his first
full union budget on Saturday Finance Minister Arun Jaitley said that
"to ensure that our victory over inflation is institutionalized and
hence continues, we have concluded a Monetary Policy Framework
Agreement with the RBI, as I had promised in my budget speech for
2014-15."
"We will move to amend the RBI Act this year, to provide for a Monetary Policy Committee," he added.
The agreement also requires the RBI to give the government a report in case the target is missed for a specified period.
The
RBI is also required to make public every six months a document
explaining the sources of inflation and the inflation forecast for the
period between six and eight months.
The agreement provides two criteria under which RBI would be deemed to have missed the target for inflation.
If
inflation is more than 6 percent for three consecutive quarters for
fiscal 2015-16 and all subsequent years, or if it is less than two
percent for three consecutive quarters in 2016-17 and subsequently, then
the RBI would be considered as having failed to meet the set target.
In
such a case, the RBI in a report to the government would give the
reasons for its failure, remedial action proposed and an estimated time
within which the given target would be reached, the document said.
In
case of any dispute arising out of interpretation of the agreement, it
would be resolved through a meeting between the RBI governor and the
government, it added.
The new monetary policy committee, which
will set the inflation target, will have eight members, including a
finance ministry nominee and external members.
The RBI governor will head the panel and, as such, will have the veto power in the new monetary policy framework.
Consumer price index (CPI)-based inflation rose to 5.11 percent in January from 4.28 percent in December.
RBI
governor Raghuram Rajan, known for keeping a hawk eye on inflation,
when asked about the lack of forward guidance in February's monetary
policy review, told reporters in Mumbai: "The guidance remains what it
was when we cut rates (in January). Further action will depend on
developments on the fiscal front and on the disinflationary process."
In
this connection, Finance Minister Arun Jaitley Saturday extended the
target deadline for controlling fiscal deficit to three percent
reasoning that insistence on a pre-set timetable to contain the deficit
would harm growth prospects.
"I will complete the journey to a
fiscal deficit of three percent in three years, rather than the two
years envisaged previously," Jaitley told the Lok Sabha while presenting
the NDA government's first full budget.
"Thus, for the next
three years, my targets are 3.9 percent for 2015-16, 3.5 percent for
2016-17, and 3.0 percent for 2017-18," he said.
Calling the
deficit deadline postponement a "goal missed", former RBI governor and
chairman of the PM's Economic Advisory Council C.Rangarajan said that "a
high level of fiscal deficit leads to growing debt and interest payment
burden."
Jaitley has a headache in controlling the fiscal
deficit because the tax revenue earned by the central government as a
percentage of the GDP has been falling over the years.
Tax
revenue in 2007-2008 stood at 11.9 percent of the GDP. By 2013-2014, it
had fallen to 10 percent of GDP and in 2014-2015 it is expected to fall
further to 9.6 percent, signifying the government`s declining ability
to service its accumulated debt.
The new monetary policy framework is likely to get constitutional recognition during the course of the next fiscal.