Business
Revolutionary budget sparks Rajan to cut rates (News Analysis)
By
Biswajit ChoudhuryThe second unscheduled cut on Wednesday - within two months - in the
repo rate at which the Reserve Bank of India (RBI) lends to commercial
banks was not as unexpected as the first in January.
Indeed, it
could even be called expected after the weekend's historic announcement
by Finance Minister Arun Jaitley in his first full budget speech to the
Lok Sabha of the government signing the Monetary Policy Framework
Agreement with the RBI for controlling inflation.
The agreement will become a law that will provide for a monetary policy committee, Jaitley said.
Signed
last month, the agreement is to "primarily maintain price stability
while keeping in mind the objective of growth." It says the RBI will
aim to bring retail inflation below six percent by January 2016 and to
around four percent by fiscal 2016-17.
Perhaps RBI Governor
Raghuram Rajan was being enigmatic in keeping with his "rockstar" image
in deflecting spotters of Wednesday's rate cut off his trail, when he
said on Monday that though central banks everywhere are reducing
interest rates to very low levels, the RBI is unable to do so quickly
owing to "high inflation".
"A lot of that money is coming to us.
We have got an avalanche of capital inflows. Our problem is we also
have high inflation, we cannot cut interest rates very quickly to the
bone in order to tell those countries - don't come here expecting high
interest rates," Rajan told a group of students here.
The consumer price index (CPI)-based inflation rose to 5.11 percent in January from 4.28 percent last December.
Indeed,
the impression that Rajan's statement Monday was deflecting attention
from Wednesday's cut by 25 basis points is strengthened by the text of
the RBI release which said that "given low capacity utilization" and
still-weak indicators of production and credit off-take, it is
appropriate for RBI to be pre-emptive in its policy action to utilize
the available space for monetary accommodation".
If anything,
Jaitley, in his landmark budget, had provided the RBI governor some
reason not to cut interest rates by extending the target deadline for
controlling fiscal deficit to three percent, reasoning that insistence
on a timetable to contain the deficit would harm growth prospects.
The
targets for the next three years have been set at 3.9 percent for
2015-16, 3.5 percent for 2016-17, and 3.0 percent for 2017-18.
Rajan,
who in announcing the rate cut in January had stated that "the key to
further easing are data that confirm continuing disinflationary
pressures and sustained high quality fiscal consolidation", said on
Wednesday after reducing the rate to 7.5 percent that "the fiscal
consolidation programme, while delayed, may compensate in quality,
especially if state governments are cooperative".
According to
data released this week, the fiscal deficit exceed the budget estimate
within the first 10 months of the current fiscal (April-January),
crossing 107 percent at Rs.568,000 crore.
It is here that the
2015-16 budget comes as a quasi-revolutionary measure in India's
economic history, signalling the shift in budgetary philosophy on
subsidies from a rights-based to a reformist one following changes made
in their modes of disbursement.
This occurs under the head of
"Good Governance" in Jaitley's budget speech, which sets out the
changes being brought about through the cashless transfer of subsidy
through the direct benefit transfer system.
India was now ready
to "take off" and "fly", Jaitley said, its engines finding extra thrust
from falling oil prices, but he as finance minister was being held in
check by low tax buoyancy where the tax to GDP ratio is a measly 10
percent.
Jaitley Saturday proposed to cut the corporate tax rate
by five percent to 25 percent over the next four years while increasing
the service plus education cess from 12.36 percent to a consolidated 14
percent.
The indirect tax proposals would net Rs.23,383 crore while the direct tax proposals would see Rs.8,315 crore revenue forgone.
Even
as he announced a range of social security schemes there were heavy
cuts in social sectors ranging from agriculture, drinking water and
sanitation, panchayat raj, water resources to the ministry of women and
child development to the tone of Rs.439,192.25 crore, in order to keep
to the fiscal deficit target. There is also a reduction in allocation
to schemes for scheduled castes and scheduled tribes.
Jaitley has
attempted to realize multiple goals like higher growth, increase in
investment and wider social safety nets in line with his philosophy
about reforms in India being the art of the possible and not about a few
"big bang" ideas.
"In a country where 30 percent of people are
living below the poverty line, your reforms cannot be one that you
simply confront public opinion, or the sectors that you simply find a
huge amount of reluctance for reformation," Jaitley said last year at
the World Economic Forum's India Economic Summit here.
If the
Goods and Services Tax is implemented from the start of the 2016-17
fiscal to usher in a common market, Jaitley, who learnt his economics in
Delhi University, would be bringing to fruition the dreams of the
nationalist bourgeoisie which sustained Mahatma Gandhi in his struggle
against the British Empire.
(Biswajit Choudhury can be reached at [email protected])