Will Chidambaram's fiscal consolidation plan nudge the RBI to cut rates?

On October 29, Finance Minister Palaniappan Chidambaram said India would make one more attempt to follow the path of fiscal prudence. He even laid out a five-year roadmap.
 
According to Chidambaram, the roadmap will have legislative sanction as the targets would be plugged into the Fiscal Responsibility and Budget Management Act (FRBM).

The FRBM Act was an uncommon piece of legislation. It was passed in 2003 with all political parties voting in favour of disciplining the government's borrowing to insulate the economy from profligate governments.

Ironically, when he last presented the Budget, in February 2008, Chidambaram said he had no choice but to violate some of the FRBM Act's targets on account of the United Progressive Alliance's social sector spending commitments. This included a Rs 65,000 crore farm loan waiver, which was spread out over a few years. The targets were not binding on the government of the day and the finance minister only had to explain the reason for the deviation to Parliament.

Since returning as finance minister in August 2012, Chidambaram has not lost an opportunity to underscore the economic threat arising out of the government's profligacy.

At this stage, it is not clear if the legislation will be amended to make it more difficult for any finance minister to deviate from the target.

In the absence of a detailed plan to deal with India's burgeoning subsidies, it is difficult to take the new FRBM roadmap seriously. The last time the roadmap was breached, India had seen three straight years of economic growth above 9 per cent, and buoyant revenue. Now, with growth slowing down to 6.5 per cent and tax collections lacklustre, sticking to the roadmap will be far more difficult.

The timing of Chidambaram's announcement is bound to stoke curiosity. The new roadmap was announced a day before the Reserve Bank of India's (RBI) quarterly monetary policy statement. For a few weeks now, finance ministry officials have let it be known through the media that they want the RBI to complement their attempts to rein in the fiscal deficit with a rate cut.

It appears as if Chidambaram's FRBM roadmap announcement was timed to send the RBI a message.