In its last meeting, the six members of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) had voted unanimously in favour of a 25 bps cut in the benchmark repo rate and for a shift in the policy stance from neutral to accomodative. But the minutes of that meeting, released on June 20, suggest that members are divided on the future course of action. Deputy RBI governor Viral Acharya and economist Chetan Ghate continue to be perturbed by the upside risks to food inflation and a likely fiscal slippage. But the other members seem to have discounted these concerns, placing more weightage on arresting the slowdown in economic activity. They have indicated that a minor fiscal slippage is unlikely to have a bearing on their vote in the next policy meeting in August.
In the run-up to the budget, there has been debate over the government’s revenue numbers, the true extent of the fiscal slippage, off-budget borrowings by public sector companies, and their impact on monetary policy. Tax collection data shows that central goods and services tax collections (CGST) would have to grow by 34 per cent in FY20, and income tax collections would have to rise by 35 per cent to meet the FY20 interim budget targets. Meeting these targets is a tall order. While the finance minister could consider revising the interim budget targets, adhering to expenditure targets could imply a minor fiscal slippage resulting in higher government borrowings. Apart from the possible inflationary consequences, higher government borrowings could crowd-out the private sector in the face of declining household savings. This concern was articulated by Deputy Governor Acharya in the last MPC meeting. Chetan Ghate, too, flagged these risks. But MPC member Ravindra Dholakia has argued the opposite. Making the case for counter-cyclical policy — greater government spending during a cyclical downturn — Dholakia has argued that a minor fiscal slippage is unlikely to be inflationary in the current environment when demand continues to be subdued.
Dholakia’s view seems to resonate with other MPC members, including RBI Governor Shaktikanta Das. Other members, Pami Dua and Michael Patra, too, appear to be more mindful of growth concerns. With the slowdown in economic activity more entrenched than was previously believed, clearly the primary objective appears to be that of reviving growth, discounting concerns of fiscal slippage and upside risks to inflation. On balance, it appears that the committee may end up voting 4-2 in favour of a further easing in August, irrespective of the fiscal slippage.