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Rate panel signals inflation risks from fiscal slippage.

The Monetary Policy Committee (MPC) has said the Centre's fiscal slippage could impact inflation, and the deterioration in public finances risks crowding out private finance and investment - sending a signal for "stable-macro financial management" to put growth on a sustainable path.

In the Union Budget unveiled on February 1, the government had revised the fiscal deficit target for 2017-18 to 3.5% of gross domestic product (GDP), higher than the earlier estimate of 3.2%, signalling a pause in its fiscal consolidation plan due to the uncertainty over revenues after the rollout of the GST in July. It has, however, reiterated its commitment to fiscal consolidation and hopes to meet the target of limiting the deficit to 3% of GDP by 2019-20.

The MPC has put the ball in the government's court and wants it to have a renewed focus on fiscal consolidation. While the statement had some praise for the Budget's rural focus, the caution on inflation risks was loud and clear.

"The focus of the Union Budget on the rural and infrastructure sectors is also a welcome development as it would support rural incomes and investment, and in turn provide a further push to aggregate demand and economic activity.

"The committee is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management," it added.

It said the fiscal slippage has broader macro-financial implications on economy-wide borrowing costs, which have already started rising. The MPC has preferred to wait to assess the impact of the higher minimum support price plan of the government on inflation. It also expects the increase in customs duty to have an inflationary impact. The government, which has been pushing for a sharp cut in interest rates last year, preferred to maintain a silence on Wednesday when the MPC decided to hold rates. There seems to be a change in strategy with the government preferring not to comment on interest rate cuts.

"The possible hardening of inflation due to fiscal slippages and turn in commodity cycle, which may give cost-push pressure on prices, had a bearing on the RBI decision to keep the rate constant," said Soumya Kanti Ghosh, group chief economic adviser, SBI.

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Publication:Pakistan & Gulf Economist
Date:Feb 18, 2018
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