Govt fiscal map ups likelihood of rate-cut: Experts

To discuss the fiscal consolidation roadmap unveiled by the finance minister on Monday, the RBI's macroeconomic report and what the Reserve Bank is likely to announce on Tuesday, leading economists Shubhada Rao, chief economist, YES Bank and Ajit Ranade, chief economist, Aditya Birla Group discuss the probability of the much-expected cut in rates and explain other attendant issues on CNBC-TV18.

Below is the edited transcript of the discussion on CNBC-TV18. Q: The finance minister reiterated the government's intent or seriousness to cut down the fiscal deficit to about 5.3 percent, a day ahead of the Reserve Bank's credit policy. In the context of what has been stated by the Reserve Bank in its macroeconomic report, do you still believe Tuesday's credit policy will be a status quo one or is there at least a window for a CRR cut? Rao: I would think that given the timing of the announcement of a map for fiscal consolidation, there is a likelihood of the RBI reciprocating with 25-basis point cut in CRR. Though the government’s intent towards fiscal consolidation over the next two- to-three years was very clearly spelt out, the RBI, in its report, has raised the question of implementation while acknowledging that the government's intent is in the right spirit.
The RBI has added that the implementation of measures to ensure fiscal consolidation was frequently emphasised as an enabling facilitator for further cut in rates. So though there is a chance of a CRR cut, we do believe that there are other ways of easing liquidity such as raising funds through open market operations also. Q: Do you believe that the RBI may decide to throw a surprise with a move on the repo rate? Ranade: We are on the eve of the mid-year credit policy which is of greater significance as it’s not just about rates but also about other regulations and other issues of policy. The  RBI's macroeconomic report that was released today states that inflation is above the set target and it was expected to be at 7.3 percent and now the central bank estimates inflation to be at 7.7 percent.
The central bank also adds that it expects inflation to soften in the next six months and if that is the case, the central bank has explained that it would be concerned about lower growth. The RBI’s earlier target for growth was 6.5 percent but that ahs been revised to 5.7 percent and even that forecast is thought to be an optimistic view.
So inflation expected to soften in the next six months and unexpectedly slower-than-expected economic growth makes a good case for some central bank initiative on the rates. Q: How do you view the Reserve Bank's statement advising cautious calibration to contain macroeconomic risks? Ranade: The key macroeconomic risk is the widening current account deficit which could be contained by triggering a potentially virtuous cycle. The RBI initiates a rate cut which triggers positive sentiment which brings in inflows which then creates a positive pressure on the rupee that contributes to softening inflation, rates and finally ease pressure on the current account deficit.
_PAGEBREAK_ Q: Do you believe that it’s not such a big leap of faith for the RBI to cut rates? Rao: I think that the RBI would rather be cautious than take this leap of faith. When the RBI frontloaded a rate cut 50 bps in April, it took a good five months for the government to react. So while there is a fair point that the RBI has sounded slightly less hawkish in giving guidance as far as inflation is concerned and also acknowledging that growth probably is softening.
But more importantly I think that RBI has explained that while inflation still persists and the issue of twin-deficit continues to dominate concerns, RBI would facilitate monetary easing. I think there is much to glean from that particular statement.
The RBI also adds that growth needs fiscal consolidation and easing policy hurdles for investment in infrastructure. So it has acknowledged that monetary easing is not the most important factor for reviving growth. From these statements it is clear that the RBI is not definitely ruling out monetary action, but is waiting for the appropriate time to take the initiative. Q: How do you read the roadmap for fiscal consolidation and the fiscal deficit? Ranade: I believe the finance minister made a statement explaining that while the government has projected fiscal deficit at 5.1 percent in the Budget, it’s going to be at 5.3 percent. Though that sounds optimistic, the markets estimated that the estimate of the deficit at 5.1 percent is going to slip by a wide margin and is going be at 6 percent.
So, if that is a signal of sorts, then it is heartening as it means the government will take some harsh decisions. The finance minister added that the certain recommendations of the Kelkar Committee Report would be adopted if not in toto. Q: But did the finance minister reveal about adopting recommendations that called for the removal of all subsidies? Ranade: No. But the Kelkar report's recommendations explain other ideas to reduce the fiscal deficit and some of them were implemented. The committee’s recommendation of using a 'call' option while conducting private disinvestment was implemented in the case of UTI, if you recall. So this is actually a positive signal from the government. Q: Though the finance minister has announced that the government would be able to meet the fiscal deficit of 5.3 percent, it is unclear how it go about doing so. Can you throw some light on this? Rao: I think achieving 5.3 percent is going to be a challenge because the economy is riding on a Rs 70,000-crore revenue receipt based on expected revenues from the 2G spectrum auction and disinvestment. So I think everything is riding on growth which is fairly subdued particularly in the manufacturing sector.
There are going to be some slippages in tax collections and I think its very important to implement some structural framework in place. The tax-to-GDP ratio needs to be improved as that is more sustainable and very clearly needs to be backed by expenditure such as cash transfers of subsides.
These kind of measures may look small, but have a larger impact in disciplining subsidies. I think these are the factors which should help in the achievement of the roadmap that has been laid down.