January 28, 2025

Although it was expected that the MPC of the RBI would hold rates, what was not expected was the veiled warning the apex bank chose to give to the government. The RBI was categorical in saying that if fiscal consolidation is not adhered to and even made stronger; the country is in for tough times ahead. This is a very sane and timely warning.

The government was committed to fiscal deficit of 3.2% this year. It has now said that this will be closer to 3.5%. Even this figure might increase. This is bad fiscal management. As it is, India has frequently postponed what it had set out to do in the FRBM Act. The fiscal deficit was to be pruned to 3% by 2008. Even ten years later, there is no hope of achieving that. This is mainly due to the fact that revenue deficit keeps bloating, although the NDA government has kept it in check.

In order to bring down the fiscal deficit, the government will have to run a tight ship. This does not mean it will have to lay off people or otherwise cut down on necessary expenditure. But at a conservative estimate, there is a leakage of 5 to 10 percent on account of wasteful expenditure that can be controlled. This is where the focus should be. The NDA government is working (the recent decision to make the Railway Board less top heavy was one of them) on that and the results will take time in coming. But a lot more needs to be done in this area.

The RBI is mainly worried about inflation. It has already revised the target from 4% to 5%. A one percent jump is massive, especially since there is greater jump in food inflation, something that hits citizens on a daily basis. Interest rate reduction has been put on the back burner in face of rising inflation. The government should heed the RBI warning and must not deviate from fiscal targets.