A succinct appraisal of the fiscal policy that the Reserve Bank of India has begun inserting in its macro-economic and monetary survey every quarter is the most significant change that has crept into its quarterly pre-credit analysis, of late.
More than any other section, this analysis has developed into an excellent read of how the monetary authority evaluates the response by the fiscal authority (New Delhi) to the twin challenges of keeping growth at a high level and inflation under control. The Bank this time goes on to list ten sets of fiscal measures the government took in a three week slab from September 13 to October 5. For each set the RBI observations show it is more impressed with those like reduction in diesel subsidy though it acknowledges inflation could rise in the near term and the proposed disinvestment in public sector units. It is more muted in appreciating what the government thought were more big bang reform measures like FDI in multi-brand retail. The bank observation is this will create “Moderate FDI inflows likely over next 1–3 years in retail. This will improve organised retail penetration, but its market share may still remain less than 10 per cent”.
Significantly the RBI does not include the Shome committee recommendations in the same period on GAAR in this list of fiscal measures, though the stock markets were hugely impressed. These differences notwithstanding the RBI conclusion is clear. “The dampened investment climate may revive gradually following the demonstrated intent for fiscal policy reforms and commitment to much-awaited active policy to propel the economy forward”.
And that gives an excellent pointer on whether Mint Street would move beyond the liquidity enhancing steps it announced in two tranches, slashing the cash reserve ratio by 25 basis points each time in July and September.
George is a Senior Editor based in Mumbai.