The Reserve Bank of India, on Thursday, maintained that improvement in government finances by way of fiscal consolidation would be the best way to avert the possibility of a sovereign rating downgrade by global rating agencies such as Moody’s and Fitch.

Speaking to reporters here, RBI Deputy Governor Subir Gokarn pointed out that an exercise in fiscal consolidation would also lead to a moderation in inflation and easing of interest rates. “The best way to prevent it [sovereign rating downgrade] would be to put in place a sustainable process of fiscal consolidation because that is the most important parameter, indicator on which that risk or threat has manifested. If we can do that reduction...that risk is averted.’’

Dr. Gokarn noted that measures that could be put in place alongside such as easing supply-side constraints to contain food inflation, policy initiatives towards opening up foreign direct investment and encouraging inflow of foreign capital would also help in spurring overall growth. “... So these are the things which will help stimulate growth without putting pressure on inflation,” he said.

It may be recalled that global rating agencies, while lowering the outlook to negative a few months ago, had warned that the country’s sovereign rating could be downgraded to junk status if the basic economic fundamentals did not show any improvement. The threat was stated in the wake of India’s GDP growth decelerating to a nine-year low at 5.3 per cent during the last quarter of 2011-12 even as inflation continued to rule at persistently high levels. As part of the government’s efforts to get the economy back on track, Finance Minister P. Chidambaram constituted an expert committee headed by Vijay Kelkar with Indira Rajaraman and Sanjiv Misra as members to prepare a roadmap for fiscal consolidation. Such an exercise assumed significance as the Centre's fiscal deficit was budgeted at 5.1 per cent for the current fiscal but is estimated to be much higher than targeted.

A much clearer picture of the overall economic scenario is expected to be made available by the Prime Minister’s Economic Advisory Council Chairman C. Rangarajan on Friday while unveiling the mid-year review and outlook of the economy.

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