RBI calls for urgent fiscal prudence by the Centre

Need to cap total debt as proportion of GDP

Making a strong case for promoting fiscal consolidation in the forthcoming budget, the Reserve Bank of India, on Monday, said that it was necessary to stimulate growth.

“We can’t discount the importance of fiscal consolidation contributing to growth. It is not that growth first and then we get fiscal consolidation. They are interrelated,” RBI Deputy Governor Subir Gokarn said here.

Subdued receipts

The government’s fiscal deficit in 2011-12 is expected to exceed the budget estimate of 4.6 per cent of the GDP on account of subdued receipts and overshooting of the subsidy bill by at least Rs 1 lakh crore over and above the original projection.

Finance Minister Pranab Mukherjee had earlier indicated that he would announce steps to contain fiscal deficit during the budget for 2012-13 to be unveiled sometime in March.

Referring to the issue of inflation, Gokarn underlined the need for raising productivity of protein-based items which had witnessed sharp increase in the recent times.

“Drivers of food inflation are really supply demand imbalance. There has been a shift of demand towards protein based items. We ought to raise productivity of protein items”, he said at an Edelweiss Investor Conference here.

Although the food inflation has turned negative in recent past, the overall inflation was 7.5 per cent in December. It is expected to moderate to 6-7 per cent by March end.

Fiscal deficit

As regards fiscal deficit, Reserve Bank of India Governor D Subbarao had earlier urged the government to put a cap on the public debt as it would hurt growth.

“There is an inflexion point beyond which fiscal deficits militate against growth.
Government borrowing is not bad per se, but excessive borrowing is. There is therefore a need to cap total public debt as a proportion of GDP,” he had said.