It is not at all surprising that two important economic policy statements — the Reserve Bank of India's mid-quarter monetary policy review and the Economic Survey — both released one day ahead of the Union budget, should focus on the core concerns of the macro economy. The RBI's scheduled mid-quarter policy review was hardly the non-event it was feared it would turn out to be. A cut in interest rates was not on the cards and with no expectation of one, attention turned to the RBI's views on the economy, especially inflation, fiscal consolidation and growth. Inevitably there is an overlap between the central bank's views and the Economic Survey, although they vary in their emphasis. Both agree with the official forecast that the economy will grow by 6.9 per cent during this year. However the Survey is much more optimistic about the future, predicting a pick up in growth to 7.6 per cent in 2012-13 and 8.6 per cent the following year. These numbers do not appear very realistic. In previous years, the Survey has sometimes been embarrassingly wrong with its rosy projections. Last year, for example, the forecast was for a growth rate of 9 per cent and for the fiscal deficit to be contained within 4.1 per cent of the GDP during the current year, way off from the latest consensus estimate of 6 per cent.
In contrast, the RBI has been circumspect, pointing out that government finances have been deteriorating during 2011-12. Key deficit indicators have, by January, crossed the budget estimates for the full year. Tax revenues have been sluggish and the government's non-plan expenditure, particularly on subsidies, has gone up sharply. The slippage in the fiscal deficit has fuelled inflationary pressures, whose containment will depend upon a credible action plan for fiscal consolidation. That is an area which the budget is bound to focus on but the Survey's bland assertion that fiscal consolidation is on track needs to be supported by evidence. Again, while the Economic Survey takes note of the moderation in inflation by the end of last year, it has ignored the more recent spike caused by a spurt in food prices. In fact, the battle against inflation that has dominated policy discourse is far from over. As the RBI records, upside risks to inflation have increased. Crude oil prices remain high and the rupee has depreciated. The trade deficit has widened sharply and financing the current account deficit is proving to be a daunting task. The key take-away from the RBI report is that notwithstanding a slowdown, inflation risks remain high. This is surely something the Finance Minister will have to ponder over.