Millennium Post

FinMin and RBI chief at loggerheads

One wonders how the finance minister P Chidambaram and the Reserve Bank governor D Subbarao will greet each other when they meet in Mexico city to attend the G20 finance ministers and central bank governors’ consultations over the weekend. Outside the country, they will surely exchange pleasantries. However, given that the finance minister gets piqued easily and does remember as well, the initial reactions might not be too nice.

This is because in course of the week the two had crossed swords. In the confrontation, the RBI governor has certainly come on top and also played his words very deftly. To recall the facts, the finance minister had presented a plan of action for controlling fiscal deficit a day before the RBI was to announce its monetary policy review on 30 October.

The finance minister had specifically mentioned that everyone in India must ‘take note’ of his declaration of a fiscal correction road map based on the Kelkar Committee recommendations. As is Chidambaram’s wont, he truly believes his is the last word.  

Unfortunately this time, the RBI governor just refused to take note of any fact of fiscal correction. He refused government pleas for a cut in interest rate to push up the growth rate and observed that inflation was still a cause for concern along with high and run away fiscal numbers. He felt that the fiscal situation was showing a trend that might exceed the budgeted amount.

This disturbed the finance minister no end. So much so that he made a statement that fiscal correction was doable and that the government was committed to ‘going it alone’ in its pursuit of growth and fiscal consolidation. In fact, the finance minister could have done without the statement as it only betrayed his frustration with the central bank’s attitude to inflation control and growth priorities.

Later still, while addressing the parliamentary consultative committee attached to the finance ministry, Chidambaram asserted that controlling the fiscal deficit was doable. He reiterated that bringing fiscal deficit down in course of the current year was ‘doable’.

He assured that ‘best efforts would be made to contain fiscal deficit at 5.3 per cent, during the current financial year.’ The Kelkar Committee has stated that given current economic trends, it could be 6.1 per cent.

The strategy to achieve the target would be to maximise revenue collections and control expenditure. However, on closer examination it should become plain that the finance minister’s claims about fiscal consolidation somewhat runs hollow. The RBI governor could not have failed to ‘take note’ of that.

Chidambaram talks of maximising revenue. It has been seen that revenues show buoyant trends in time of robust growth of the economy and they remain sluggish when growth is low. This is natural because with growth and greater activity, the corporate sector ramps up its revenues and incomes. It is their performance that yields revenues as all major heads of revenue depend directly on the state of the corporate sector. Excise duties, income tax, corporation tax, as well as custom duty collection are all dependent on the corporate growth which this year is proving to be slow.

Additionally, the finance minister is in no position to implement the principal recommendation of the Kelkar Committee, that is, slashing away fuel subsidy. The fuel subsidy is the biggest drain on the finances of the union government and a little step towards that had created a storm as strong politically as the one that lashed the southern coastline this week.

Even a feeble attempt to curtail subsidy for cooking gas supplies had to be partially rolled back in the face of strident criticisms and forthcoming elections. Already between April and September this year (2012-2013), the under-recoveries of the oil marketing companies have crossed Rs 85,500 crores. At the current levels, with price remaining the same, the under-recoveries will be higher than last year. Since these deficits are compensated by the union government, the demand on the budget for compensation for fuel under recoveries will mount. All that Chidambaram is seeking to achieve in terms of controlling expenditure is to cut down plan development outlays. Such a course of action can at best further impinge upon growth triggers, leaving a little dent on the revenues.

The finance minister cannot be unaware of such unpleasant ground realities. Indeed, he must be a frustrated man himself. Some of that had come out when he was addressing his colleagues on the union council of ministries at its first meeting after the reshuffle. Chidambaram had underlined the grim facts of the economy and cautioned against downgrading of India to a junk status.

It was against such a background that he was hoping for a helping hand from the RBI governor. However, that was not to be and the governor insisted on better behaviour from the politician before he could relent.

The good thing is that differences between the central bank of a country and its finance ministers are not unknown. In fact, they are well known and often highly visible. Some high visibility tiffs have been happening in Germany since the 1930s over inflation control and government’s moves.

In fact, in a recent episode the finance minister of a Latin American country and its central bank governor had nearly come to blows over their differing perceptions and need for actions. Chidambaram and Subbarao are not yet at that point. Surely, the economy will take care of their differences with a turn for the better. [IPA]
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