Some Reserve Bank of India (RBI) officials are worried that a populist budget could put the onus of driving growth on them but limit their ability to respond through big rate cuts this year.
Finance Minister Arun Jaitley increased spending on farm and social sectors in the 2016-17 fiscal year on Monday in a boost to rural India, where most of the country's 1.3 billion people live.
He curbed capital expenditure growth compared to the previous year, yet stuck to his commitment to reduce the fiscal deficit to 3.5 percent of gross domestic product.
Three policymakers aware of the central bank's deliberations on the budget said they are combing through the numbers to test how Jaitley struck a balance, and question some of the assumptions.
An expected $16.6 billion salary and pensions hike for government employees, for example, is inflationary and hasn't been fully accounted for in the budget, they said.
Also, they said the government's revenue expectation from asset sales appeared optimistic given that these fell nearly two-thirds short of the target in 2015-16.
Additional expenses on salaries and a shortfall in receipts could force the government to cut back on capital expenditure to meet its fiscal deficit target. That would hit growth and increase pressure on the RBI to do more, the officials said. "If private investment doesn't pick up, the burden on monetary policy to boost growth will increase," one of them said. A finance ministry official said the impact of higher salaries on inflation will be marginal.
On Thursday, Junior Finance Minister Jayant Sinha acknowledged that a tight fiscal policy will help in further monetary policy easing.
"If we don't provide that (macroeconomic stability) space to monetary policy by generally running a relatively tighter fiscal policy, we cannot expect monetary policy to loosen up as a result of that," Sinha said at an event.
Published - March 04, 2016 01:17 am IST
