Members of the Technical Advisory Committee (TAC), set up by the Reserve Bank of India, expect no relief on the fiscal deficit front in the current financial year.
In a meeting held on July 25, ahead of the first quarter monetary policy review, the members also said that diesel price revision, which is required to contain subsidies, would be difficult against the backdrop of drought-like situation.
"According to some members, diesel price revision to contain subsidies looks very difficult due to the looming drought situation," said the Reserve Bank of India (RBI) in the minutes of the TAC meeting released on Tuesday.
In 2011-12, India's fiscal deficit was at 5.9 per cent of GDP. The government aims at bringing it down to 5.1 per cent in the current financial year. "Many members apprehended that there could be a slippage in the fiscal deficit in 2012-13," said the central bank.
The meeting was held on July 25, following which RBI announced the first quarter monetary policy review on July 31. The central bank had stated that immediate action would be required on fuel and fertiliser subsidies if the government aims at restricting expenditure on subsidies to lower than two per cent of GDP, as set out in the Union Budget.
The members of TAC also expressed concerns over India's current account deficit, though there was some improvement due to a fall in international oil prices and gold imports.
"Unless big-ticket FDI projects get clearance, the situation is unlikely to improve," said RBI in the release. Members also cautioned against excessive reliance on short-term foreign debt to finance the current account deficit.
In terms of monetary policy action, five out of seven external members suggested that RBI should not change the policy rate as no "credible" action was expected from the government.
"They felt that given fiscal dominance, double-digit consumer price inflation and no realistic expectation of credible action from the government, the Reserve Bank needs to focus on tempering inflation expectations," RBI said in the release. The central bank had maintained status quo on policy rates on July 31.
A member was of the view that RBI should go for aggressive open market operations instead of cutting cash reserve ratio (CRR) to address liquidity conditions. CRR is at 4.75 per cent which was considered "already low" by a member of TAC. The central bank has cut CRR by 125 basis points since January 2012.
On the domestic front, members said the situation is "by far the most difficult in last several years." They said there was growing evidence of slowdown of domestic growth. "The economy is in a bind with slackening growth and elevated inflation. But the remedies, members felt, lie with the government," said RBI.
RBI Governor D Subbarao chaired the TAC meeting. All deputy governors and external members - Y H Malegam, Rakesh Mohan, Indira Rajaraman, Sudipto Mundle, Errol D'Souza and Ashima Goyal - attended.
