Economy faces several risks to fiscal health

Inflation outlook calls for ‘close vigil,’ says the central bank

November 27, 2018 10:27 pm | Updated 10:27 pm IST - NEW DELHI

NEW DELHI, 21/11/2018: The Reserve Bank of India in New Delhi, November 21, 2018. 
Photo: V.V. Krishnan / The Hindu

NEW DELHI, 21/11/2018: The Reserve Bank of India in New Delhi, November 21, 2018. Photo: V.V. Krishnan / The Hindu

The Reserve Bank of India (RBI) has highlighted several risks to the Indian economy, including oil prices, the uncertainty over the effect of the minimum support price (MSP) hike and the revenue impact of the lower-than-expected GST collections and the cut in excise duty on fuel.

These risks, the central bank said in its submissions to the Standing Committee on Finance, could pose a challenge to the government’s commitment to meeting the Fiscal Responsibility and Budget Management targets.

“The key downside risks to growth are high international commodity prices — especially of crude oil (although they have eased recently, there are significant uncertainties), spillovers from tightening global financial conditions, geo-political tensions, trade wars, financial turbulence, and the overhang of impairment in domestic banking and corporate balance sheets,” the RBI said.The central bank added that the decline in the gross saving rate, mainly due to the decline in household gross financial savings, is another cause for concern.

Regarding inflation, the RBI said that the outlook calls for a “close vigil” over the next few months as several upside risks persist.

“While food inflation has remained unusually benign so far during the year, there is uncertainty about the exact impact of the announced MSPs on food inflation,” the RBI said.

“Significant volatility in global crude oil prices and financial markets, a sharp rise in input costs combined with rising pricing power of firms, risk of fiscal slippage at the Centre and/or State levels, and the staggered impact of HRA revisions by the State governments could pose upside risks to the inflation trajectory.”

The RBI said that there are factors both on the revenue and expenditure side that pose risks to the overall fiscal outlook.

GST collections

“Laggard” GST collections and the cut in Union excise duties on petroleum products by the Centre as well as 18 State governments pose risks on the revenue side, while higher MSPs combined with the ramping up of food procurement and “unbudgeted” farm loan waivers by States could put pressure on expenditure.

“Accordingly, concerted efforts towards consolidation will be needed for achieving the revised FRBM targets, i.e., the central government debt to GDP ratio of 40% and the general government debt to GDP ratio of 60% by 2024-25,” it said.

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