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At the C D Deshmukh Memorial Lecture organised last week by the National Council of Applied Economic Research its director Shekhar Shah had an awkward moment when his voice cracked during his address. Reserve Bank of India (RBI) Governor Raghuram Rajan came to Shah’s rescue by walking up to him and offering him a glass of water. After recovering his composure Shah said “When the RBI governor offers you water when you need it you know monetary policy is in the right hands.” Rajan in his lecture later at the same event said he preferred the path of macroeconomic stability to reckless economic growth. In his policy review on February 2 the governor did not cut policy rates preferring to wait for Budget announcements on fiscal consolidation.

Reserve Bank of India governor Raghuram Rajan on Friday said that a growth rate of over 7% was a credible achievement given wobbly conditions in the world economy but cautioned the government against being “over ambitious” and asked it to contain its borrowings.

“It is to the immense credit of the government that we have over 7% growth low inflation and a low current account deficit” Rajan said. “But it is at such times that we should not be overambitious.” Rajan made these comments during the course of the NCAER’s annual CD Deshmukh memorial lecture on Friday.

Rajan asked the government to get its fiscal math right cautioning that a strategy of borrowing more to boost spending and investment could prove counter-productive and upset the budding recovery signs.

The RBI governor underlined the need for maintaining policy consistency to reinforce India’s credibility as a stable global growth engine.
“Macroeconomic stability relies immensely on policy credibility which is the public belief that policy will depart from the charted course only under extreme necessity and not because of convenience” he said.

He said some recent policies such as UDAY could weaken the government’s balance sheet.

“With UDAY the scheme to revive state power distribution companies coming into operation in the next fiscal it is unlikely that states will be shrinking their deficits which puts pressure on the centre to adjust more” he said.

The government has approved plans for the financially embattled states’ electricity boards in a Centre-assisted bond buying scheme under an umbrella programme called UDAY.

Rajan underlined the need to have healthy banks and said as the health of banks recovers the issue of mergers can be addressed and a few lenders will have to merge to optimise their use of resources. “While the profitability of some banks may be impaired in the short run the system once cleaned will be able to support economic growth in a sustainable and profitable way” he said.

While the government is likely to meet the fiscal deficit target of 3.9% for the current financial year it could face challenges in 2016-17 with the implementation of the One Rank One Pension and 7th Pay Commission recommendations. The fiscal deficit target for 2016-17 is 3.5%. According to IMF estimates — the benchmark for the global investor — India’s consolidated fiscal deficit went up from 7% in 2014 to 7.2% in 2015.

Rajan said the central bank would not change its strategy of targeting inflation. “Let me reiterate that we have absolutely no intent of departing from the inflation framework that has been agreed with the government.”

A day after stating that “there are problems with the way we count GDP” Rajan said he has never raised doubts over the GDP numbers and they are broadly correct. “It was not anything about new GDP numbers or the way GDP is calculated. I think it’s broadly correct” Rajan said. “You do not have to gauge intent. I am direct
He said in Mumbai on Thurs­day that “There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth”.

During global turmoil macroeconomic stability should not be risked

Ahead of the Budget Reserve Bank of India Governor Raghuram Rajan on Friday cautioned against deviation from the fiscal consolidation path which he said could hurt macroeconomic stability.

During the global turmoil macroeconomic stability should not be risked and both the government and the central bank should continue to bring down inflation Dr. Rajan said.

The growth multipliers on government spending at this juncture are likely to be much smaller so more spending will probably hurt debt dynamics.

“Put differently it is worth asking if there really are very high- return investments that we are foregoing by staying on the consolidation path?”

“As Brazil’s experience suggests the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies… We should be very careful about jeopardising our single most important strength during this period of global turmoil – macroeconomic stability.”

Taking the fiscal deficits of the Centre and states the consolidated fiscal deficit for the country rose last year to 7.2 per cent from 7 per cent. “So we actually expanded the aggregate deficit in the last calendar year.”

Originally the target was to bring down fiscal deficit to 3.6 per cent of the GDP in 2015-16 but it has been postponed by a year. Now government is targeting 3.9 per cent in the current fiscal. Deviation from the fiscal consolidation path could push up government bond yields both because of the greater volume of bonds to be financed and potential loss of government credibility on future consolidation Dr. Rajan said while delivering the CD Deshmukh Memorial lecture.

A slowing in inflation has been on account of the “joint work” of the government and the RBI aided to some extent by the fall in international commodity prices he said. “This is no mean achievement given two successive droughts that would have in the past pushed inflation into double digits.”

Dr. Rajan said that it was unfortunate that despite the success on the inflation front there are voices suggesting weakening the fight against inflation.

Inflation framework

“Let me therefore reiterate that we have absolutely no intent of departing from the inflation framework that has been agreed with the government. We look forward to the government amending the RBI Act to usher in the monetary policy committee further strengthening the framework.”

With the government’s UDAY scheme to revive state power distribution companies set to become operational in the next fiscal it is unlikely that states will be shrinking their deficits he said..

This will put pressure on the Centre to adjust more Dr. Rajan said. The NDA government had last year put a pause on the fiscal consolidation path postponing reduction in fiscal deficit target by a year.

He stressed that macroeconomic stability relies immensely on policy credibility which is the public belief that policy will depart from the charted course only under extreme necessity and not because of convenience. “If every time there is any minor difficulty we change the goal posts we signal to the markets that we have no staying power” Dr. Rajan said.

NEW DELHI: A day after stating that “there are problems with the way we count GDP” RBI Governor Raghuram Rajan today said he has never raised doubts over the GDP numbers and they are broadly correct.