Monetary panel worried over states’ loan waivers

Mumbai: Minutes of the monetary policy committee(MPC) meeting released by the RBI on Wednesday have revealed that a major concern was the undoing of the central government’s fiscal discipline by state governments through loan waivers. The statement also shows that members were hawkish on inflation with RBI executive director Michael Patra calling for a rate hike. The minutes of the meeting held on April 5 and 6 were released after a fortnight, according to RBI practice. “The general government deficit, which is high by international comparison, poses yet another risk for the path of inflation, which is likely to be exacerbated by farm loan waivers,” said the statement of the MPC, chaired by RBI governor Urjit Patel.

RBI deputy governor Viral Acharya in his statement said, “We have laid out in the resolution several upside risks (to inflation), of which geopolitical risks and undoing of the Centre’s fiscal discipline by the states concern me the most.”

The six-member MPC had voted in favour of holding key rates, citing upside risks to inflation arising from price pressure excluding food and fuel as the main reason for keeping its policy rate unchanged. It also reiterated its commitment to bring down inflation to 4%.

The minutes were released a day after the Cabinet allowed sound state government entities to borrow directly from the country’s bilateral official development assistance (ODA) partners for implementing core projects. The move, aimed at clearing funding of state projects, also raised concerns of loosening fiscal discipline among states.

Rating agencies and analysts have also been raising concerns over the burgeoning deficits of state governments. “Finances of state governments also warrant attention and here the trend has turned unfavourable in recent years. The aggregate states’ fiscal deficit widened from 2% of GSDP (gross state domestic product) in FY11-12 to more than 3% in FY16-17. These deficits are likely to stay wide this year (FY17-18), keeping borrowings high and delaying,” Radhika Rao, India economist, DBS, said in a report last week.

In the meeting, Patel, despite being hawkish on inflation, told the MPC that there was room for banks to further cut interest rates. “There is still room for banks to cut lending rates. For efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system,” Patel said in the minutes. The MPC was, however, positive on the impact of note ban being short-lived. Acharya said that on the growth front, the remonetisation is continuing apace and many sectors of the economy are recovering steadily after the transient slowdown. This is a view supported by most economists as well. Last week, investment bank Nomura said in a research report that the recovery in industrial production should gather momentum through 2017, supported by ongoing remonetisation, release of pent-up consumption demand, lower lending rates, higher public capex and impending pay hikes for state government employees.

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