A Responsible Budget within a Restricted Space albeit some Worries on the Expenditure-Revenue Math

The Indian Union Budget for fiscal year 2013-14 has been termed as a responsible budget under difficult circumstances, but a disappointment to those who were expecting extraordinary measures to jump-start the economy. Fiscal deficit in the current financial year has been contained to 5.2 per cent of GDP; this averts any immediate crisis in terms of a sovereign rating downgrade, but has led to a decade low quarterly GDP of 4.5% in the final quarter of 2012, with plan expenditure meant for developmental projects slashed by over rupees 90 thousand crore. With very little room for fiscal stimulus, the Budget has concentrated on infrastructure development and inclusive growth, the most demanding issues at present. Pressing issues like stimulating domestic savings and channeling those to the capital market have also been addressed within the Budget. Some tax responsibility has also been shifted to those who are better equipped to pay.

The Budget included several measures to spur investment both in markets and by corporations, including an incentive on investments in plant and machinery exceeding Rs.100 crore and extending tax breaks for small companies that grow larger, and an expansion of tax-free bonds for infrastructure and broadening of the scope of the newly introduced RGESS. Emphasis was given to foreign investment, with investor registration norms also being simplified.

However, while there is no opacity in the figures, all agree that the revenue projections are overstated in some areas; slippages are expected in tax revenues and the disinvestment target that hinges on stock market sentiment. Non-plan expenditure could also overshoot the target on account of subsidies and any disruption in oil prices.

Following are some highlights of the Budget:

The Budget estimates *Fiscal deficit at 5.2% of GDP in current FY and at 4.8% of GDP in 2013-14 *Net market borrowing at 4.84 trillion rupees in 2013-14 *Major subsidies bill at Rs.2.48 trillion (up from Rs.1.82 trillion) *Petroleum subsidy at Rs.650 billion 2013-14 as against revised Rs.968.8 billion for 2012-13 *Food subsidies at Rs.900 billion against revised Rs.850 billion in 2012-13 *Total budget expenditure at Rs.16.65 trillion, with Plan expenditure pegged at Rs.5.55 trillion *Direct tax proposals to yield Rs.133 billion, indirect tax proposal Rs.47 billion.

The Budget allocates *Rs.2.03 trillion, including Rs.867.4 billion capital expenditure to Defence in 2013-14 *Rs.801.9 billion to rural development *Rs.270.5 billion for agriculture *Rs.140 billion capital infusion in state-run banks in 2013-14 *Rs 100 billion for incremental cost for National Food Security Bill over and above food subsidy

The Budget proposes *No revision of personal income tax slabs; relief in first bracket through tax credit of Rs.2000 for earnings up to Rs.0.5 million to benefit 1.8 crore people *Home loans upto Rs.2.5 million to be allowed an additional deduction of Rs 1 lakh. *Surcharge of 10% on income exceeding Rs.10 million a year; only 42,800 people have declared such income *No change in basic customs duty rate of 10% and service tax rate of 12% *Surcharge of 5% to 10% on domestic companies whose taxable income exceeds Rs.100 million *Capital allowance of 15% to companies on investments of more than Rs.1 billion *STT on equity futures to be reduced to 0.01% from 0.017 % *CTT on non-agriculture futures contracts to be introduced at 0.01% * Zero customs duty for electrical plants and machinery *TDS at the rate of 1% on the value of the transfer of immovable properties where consideration exceeds Rs.5 million; agricultural land to be exempted *a 20% final withholding tax on profits distributed by unlisted companies to shareholders through buyback of shares *to raise import duty on certain luxury items (cars) and certain other items to boost domestic manufacturing *to issue inflation-indexed bonds *to move to revenue-sharing from profit-sharing policy in oil and gas sector *to allow FIIs to use investments in corporate, government bonds as collateral to meet margin requirements *to allow insurance, provident funds to trade directly in debt segments of stock exchanges *to allow FIIs to hedge forex exposure through exchange-traded derivatives *to treat foreign investors with stake of 10% or less as FIIs; any stake more than 10% will be treated as FDI *to make mutual fund equity schemes eligible for RGESS.

Get detailed highlights with our March-2013 issue of E-Updates.

RBI takes pro-growth measures on decelerating growth as inflation expectations moderate

The RBI, which had clearly indicated an interest rate reduction at the start of 2013, took growth enhancing measures after a period of 9 months in its third quarter review of monetary policy stating that it is now critical to arrest the loss of growth momentum. The policy repo rate and the Cash Reserve Ratio (CRR) have each been reduced by 0.25 percentage points to 7.75 per cent and 4 per cent respectively; the latter will inject approximately Rs.180 billion into the banking system. These measures ease borrowing costs and are expected to prompt banks to lower their lending interest rates, a transmission process which has already been started by some banks led by SBI, India’s largest lender.  The challenge is now on banks to manage their deposit and lending rates in a manner that stimulates lending as without affecting their net interest margins.

RBI’s supportive monetary policy was constrained due to the preponderance of non-monetary factors behind the current slowdown along with risks emanating from high inflation, and the widening current account and fiscal deficits. The central bank’s step at this juncture is justified by a number of economic data, which has also prompted the central bank to lower the growth forecast to 5.5 per cent and the inflation forecast to 6.8 per cent for end-March. GDP growth in the first half (H1) of 2012-13 was 5.4 per cent compared with growth of 7.3 per cent in H1 of 2011-12. The manufacturing sector witnessed sharp moderation in growth to just 1 per cent during April- November 2012. Capital goods industries such as machinery and equipment, electrical machinery and computing machinery registered a sharp contraction in output of over 11 per cent during the same period. Industrial growth is expected to stay below its trend due to supply and infrastructure bottlenecks and slack in external demand. With investment activity remaining subdued, the prospects of a quick recovery in industrial growth appear weak. Real fixed investment too has been trending down and could lead to irreparable damage if not arrested in time. The prolonged slowdown in industrial activity is reflected in the services sector growth too. Growth in GDP at market prices decelerated sharply to 2.8 per cent in Q2 of 2012-13 from 6.9 per cent in the corresponding period of 2011-12, the lowest in the previous 13 quarters, primarily reflecting net exports and most importantly weakening private consumption demand, while government consumption is expected to moderate in coming quarters due to fiscal consolidation efforts. On the other hand, the most important factor, so far restraining any interest rate cuts by the RBI, which is headline inflation measured by the WPI index has been moderating recently. 

Even as the timing for this rate cut is right as the external environment is slightly less hostile compared to the first half of 2012, with China and some other emerging economies and the US showing strong growth, while Euro area financial markets look more robust, RBI’s guidance for its future stance on interest rate easing understandably depends on a number of factors. These include global economic risks, such as progress on the fiscal front for the US and the Euro zone and the growth fallout of fiscal austerity, as well as domestic problems such as the containment of the widening CAD and the high fiscal deficit. Future policy will therefore be conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits.

Get the detailed highlights with the February 9 issue of E-UpDates—Ecofin’s monthly statistical bulletin. 

Indian government unveils policy basket to counter staggering growth and downgrade risks

India’s slowing growth turned from a threat to reality with India recording the worst first quarter growth in a decade, with no significant improvement in available second quarter numbers for industrial output. Growth forecasts have thus been lowered by every agency making such projections; the lowest being that by IMF at below 5% for the year 2012. Even as threats of rating downgrades were dismissed by some as of no consequence, the fact remains that our financial markets are driven by FII sentiments and many of these entities are barred from investing in junk rated countries. The Indian government has now responded with a basket of measures which not only boosts market sentiment, but if implemented could go a long way in boosting longer term capital inflows and tackling domestic issues such as supply-constraint driven inflation and the clearing of infrastructure bottlenecks.  In a string of bold initiatives to revive economic growth, the central government, first announced Rs 5 per litre increase in the regulated diesel prices and a cap on subsided cooking gas usage. It later withdrew customs and excise duties on non-subsidised LPG cylinders, a move that will help bring their prices down. The government followed up these measures with a liberalisation of foreign holding caps in the aviation, multi-brand retail, non-news broadcast media and power exchanges. Multinational retailers can invest up to 51% to open stores in states and UTs which agree to implement the decision. Minimum amount to be brought in by the foreign investor would be USD 100 million and outlets may be set up only in cities with a population of more than 10 lakh. At least 50% of FDI should be invested in 'back-end infrastructure' within three years of the first tranche. FDI in multi-brand retail, once strongly in motion, is expected to bring about significant improvements in agricultural warehousing and supply-chains.

The government also announced a plan to divest its stake in five companies. The rate of withholding tax on overseas borrowings has been reduced to 5% from 20%. The lower rate will be applicable for overseas borrowings made after July 1, 2012 and before July 1, 2015. Borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with External Commercial Borrowings regulations as administered by the RBI would be eligible for benefits of the concessional tax regime. The RGESS an initiative intended to support first-time equity investors not only expects to promote a ‘equity culture’ in India and discourage investments in gold, but also aims to revive the mutual fund industry, which has now been included in the scheme along with exchange traded funds.

The government set in motion a second wave of reforms, approving proposals allowing foreign investors to own up to 49% in insurance firms and pension funds. Signaling the government's intent to continue with reforms to boost economic growth and investor sentiment, the Cabinet cleared all amendments to the insurance bill. The cabinet also cleared the Pensions Bill and allowed FDI in Pension Funds. It also took the cap in the pension sector to 49 per cent following the insurance sector. The proposed changes to both the bills will now have to be cleared by both houses of the Parliament before they can come into effect. Till now, 26 per cent FDI was allowed in the insurance sector while the pensions business was closed to foreign investment. Looking to better serve the interests of all stakeholders, the government approved amendments to Companies Bill 2011, including changes related to spending on CSR activities. The proposed legislation will bring the law on the subject of corporate functioning and regulation in tune with the global best practices so that there is further improvement in corporate governance in the country through enhanced accountability and transparency. A provision has been introduced to make expenditure on Corporate Social Responsibility (CSR) mandatory. Giving a reform boost to commodity markets, the government approved the FCRA Bill that seeks to provide more powers to the regulator Forward Markets Commission (FMC) and allow a new category of products and to facilitate entry of institutional investors.

A segment within the government has been leaning towards cash transfers to poor households as the way out to deal with an unwieldy subsidy bill estimated at Rs 2.5 trillion (on three major subsidies—food, fuel and fertilizer). The government is set to step up its push for cash transfer of subsidies with two pilot projects validating the assumption that it would lead to significant savings for the government while enhancing benefits for users.

Get regular updates on Growth, Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

Challenges for India’s policymakers on the rise as India records worst 1st quarter growth in a decade and key debt and deficit indicators rise

Robust growth by construction, real estate and financial business services, which together account for 27% of the GDP, along with a 2.9% growth in agriculture took India’s Q1 2012-13 growth to 5.5%, even as the manufacturing sector slowed to a near-zero (0.2%) growth. All three critical drivers of growth, namely, private consumption, investment and exports continued to slow. The decline in the growth of fixed investment to 0.7% in Q1 of 2012-13 as against 14.7% in Q1 of 2011-12 is the major source of concern, as it indicates further deceleration in growth going forward. While the high rate of growth (10.9%) of construction is on a low base (3.5% in Q1 last fiscal), the 'financing, insurance, real estate and business services' sectors together grew 10.8%, even on a high base of 9.4%. The 'trade, hotels, transport and communications' sectors witnessed just 4% growth, owing partly to a high base effect (13.8% in Q1 of the last fiscal). Overall, services output slowed sharply to 6.9% in Q1 from 7.9% in the previous quarter, reflecting the lagged adverse effects of the industrial slowdown on the services sector. A survey by the central bank has shown that estimated total fixed investment by large firms in new projects which were sanctioned financial assistance nearly halved during 2011-12 indicating further slowdown in economic activity and job creation.

Slowing growth is taking its toll on revenues while government was unable to rein in its expenditure: fiscal deficit during April-July reached Rs 2.64 billion or 51% of the budgeted estimate of Rs.5.1 billion, raising fears of the government breaching its fiscal deficit target of 5.1% of GDP for the current fiscal. Government's total receipts in the first four months of the fiscal was at Rs. 1.73 billion, just 17.7% of the budgeted amount, while its expenditure climbed to Rs. 4.37 billion, or 29.3% of the budgeted amount. With increasing recourse to debt flows and drawdown of reserves to finance the CAD, various external sector vulnerability indicators showed considerable deterioration during 2011-12. The central bank’s report on India’s external debt showed that reserve cover of imports, the ratio of short-term debt to total external debt, the ratio of foreign exchange reserves to total debt, and the debt service ratio deteriorated during the financial year. On the positive side the share of government (external) debt has gone down and the country remains in a comfortable position with regard to short term debt and the debt service ratio relative to other indebted countries.  

Get regular updates on Growth, Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

What has changed Between Then and Now*?

Since 2011, we are faced with a situation where most analysts have come to agree that Europe needs fiscal integration with a fiscal authority and banking integration, a banking union with eurobonds, a banking supervisor and a European guaranteed deposit fund. Most agree even more that European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union as the ERF is a temporary programme that does not lead to permanent euro zone bonds. The main problem remains that any proposal acceptable to Germany could imply a significant loss of sovereignty over fiscal policy for the periphery, particularly Italy and Spain. On the other hand, German concerns about the moral hazard of risking German taxpayers’ money will indeed be hard to justify if meaningful reforms do not materialise in the periphery. But such reforms do take time and the human costs being inflicted in the process are turning out to be more than significant.

Coming Home, the headline figures for economic growth in India have been revised downwards; despite putting in place policy measures that have choked domestic demand and hence growth, prices continue to rise; government spending continues to grow faster than tax revenues, private and foreign investment have slowed down and the rupee has been devalued sharply by market forces, with the rupee hitting an all-time low against the dollar in late-May. Every discussion on the Indian economy centres around the need for filling chronic gaps in areas like infrastructure, skilled labour and productive farming, or on the inefficiency of the system of subsidies. Yet the government remains undecided on crucial issues like removing certain barriers to investment that could put growth back on track, while the central bank is circumstantially forced to remain hawkish in stance even though the latest numbers on growth and inflation increasingly have a stagflationary ring. Yes even in India there is a human cost involved in achieving a 6% vs a 9% growth, which may go un-noticed as the notional loss of being able to change the lives of several waiting to be pulled out of poverty and unemployment.

Missing is the swift and almost unanimous decisions taken by policy makers/implementers through the globe and missing is the flurry of actions taken to stem the Meltdown of 2008. As Time Slips By policy implementers are bent on Defying Gravity and say they are In Control and keep waiting for the Panic Attack. We are left to be Saved By A Miracle, wondering what has changed Between Then and Now? While they found institutions too big to fail they are not so unwilling to fail the very people for whom the institutions supposedly are set up. When would the time be right to come out of the moralistic view on the burden of future generations and look to the sufferings of the present one? If I Could I would be a Time Traveller to Check It Out if ignoring the Echoes and Shadows of Yesterday did we walk Into The Sunset or did we win our Race With Destiny.

(* a la Vinnie Moore)

Get regular updates on Growth, Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

RBI Makes a Move—Will the Government Reposition?

Surprising analysts and the market alike, the RBI reduced its key policy rate, the repo rate under the LAF, by a higher than expected 50 basis points to 8%. If the Government in turn can make a quick move to push forward important reforms measures, together it can provide tremendous boost to India’s wilting economy hurt by weak global growth. RBI’s decision could have been guided by the fact that India's industrial output not only rose a much slower-than expected 4.1% in February, the January figure was sharply revised downwards to a growth of 1.14% from 6.8% announced earlier.

CRR has been left unchanged at 4.75% against expectation of a reduction, instead liquidity cushion has been provided by raising the borrowing limit of banks under the marginal standing facility (MSF) from 1% to 2% of their NDTL outstanding; the MSF rate, determined with a spread of 100 basis points above the repo rate, stands at 9%. Liquidity in the system has improved since end-March with daily average borrowings by banks under the LAF averaging less than rupees one trillion in April as compared with Rs1.9 trillion in end-March.  Interest rates on short-term monetary market instruments such as commercial papers and certificates of deposits as well as 91-day treasury bills have come down in April, but the stiff long-term rates signal that the outlook on interest rates is not benign and market participants are betting on a rise in rates. Banks have already started passing on the reduced rates to their borrowers, while some banks with strong deposit bases have also reduced the rates offered on deposits. RBI’s stance however, remains hawkish; in terms of bias or guidance, the RBI has clearly indicated that headroom for further rate reduction remains limited given the upside risks to inflation in the near-to-medium term. In this situation it is now clearly the Government’s turn to show some progress in its multi-pronged reforms agenda put forward in the Union Budget, before the positive effects of the central bank’s rate cut wear off.    

The highlights of the RBI’s Annual Monetary Policy for 2012-13 will be presented in the May 2012 issue of E-UpDates, Ecofin’s Monthly Statistical Bulletin.

Some Facets of India’s Union Budget for 2012-13

The budget mostly promised to reduce the nation’s fiscal deficit and rein in costly subsidies and bring in critical reforms, but for the moment given the political situation garnering the necessary revenue has been done through increases in indirect taxation. Though allocation to critical sectors has been increased there is no immediate focus on putting the economy on a high growth trajectory.

Some Measures and Effects: Tax burden for individuals to come down slightly; income tax exemption limit has been raised. Small savers to benefit from exemptions for investments in equity and bank fixed deposits up to a limit. Inflationary in the short-run; no change in corporate tax rate, but standard rate of excise duty, as also service tax rates, raised from 10 per cent to 12 %. Capital markets get a boost; securities transaction tax (STT) on cash delivery reduced by 25 % to 0.1 %. A new equity saving scheme to allow income tax deduction to small retail investors in stocks. Corporate debt market has been opened up for qualified foreign investors (QFIIs). Provision for re-capitalising public sector banks and FIs. To tackle slowdown and supply-side bottlenecks; additional capital has been provisioned to boost agriculture, agricultural research, fertilizer industry, irrigation, infrastructure and energy. External commercial borrowing has been allowed in sectors like airlines, power projects and low-cost housing. Tax relief for stressed sectors; agriculture, infrastructure, mining, railways, roads, civil aviation, manufacturing, health and nutrition, and environment have been provided with duty relief. Social sector is a focal point; higher allocation for education, health and financial inclusion. Several legislative reforms have also been proposed in the budget. The cut down in oil subsidy bill shows intentions of increased oil-price pass-throughs.

Some Budget Numbers: Total expenditure in 2012-13 seen to be up by 29 %. Gross Tax Receipts estimated at 15.6 per cent higher than original budget estimates and 19.5 per cent over the revised estimates for 2011-12. Fiscal deficit targeted at 5.1 per cent of GDP in 2012-13, to be reduced from 5.9 per cent in 2011-12. Aim to keep subsidies under 2 % of GDP in 2012-13. Central Government debt is at 45.5 per cent of GDP.

Some Hidden Numbers: Revenue foregone on custom duties constitute over 40% of total revenue foregone on account of exemptions and special rates; the items which account for the major amount of customs duty foregone are Gold & Diamonds (mainly for export promotion) followed by Crude & Mineral Oils, which together with Fertilisers make up of almost 25% of customs duty foregone. Revenues foregone for customs and excise duties are nearly 150% of revenue collections on those accounts. With corporate tax rate held at 30%, effective tax rates for corporates have risen from around 20% in 2006-07 to 24.1% in 2010-11, due to phasing out of exemptions.

January’s sharp gain in IIP—more of a pointer to ill-health?

January’s IIP has beaten all expectations, growing at 6.8 per cent compared with December’s tepid 1.8 per cent, and driven by the manufacturing sector growing at 8.5 per cent. However, a closer look does not speak too well about fundamentals. In terms of industries, just thirteen out of the twenty two industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown positive growth during the month of January 2012. Categories that are pointers to the health of the economy such as capital goods, intermediate goods and consumer durables have all registered negative numbers. A huge 42 per cent gain in consumer non-durables is primarily powered by chewing tobacco! It is time for policy makers to undertake a more careful diagnosis of the health of the economy.

Get regular updates on Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

Some disconcerting facts surrounding India’s slowing growth...

The advance estimate of national income for 2011-12, released recently by the Central Statistical Organisation, points to a decline in India’s GDP growth rate, from 8.4 per cent last year, to 6.9 per this fiscal. Hurt by high inflation and decline in demand in interest-sensitive sectors, private final consumption expenditure, the largest component of aggregate demand, is expected to moderate to 6.5 per cent in 2011-12 from 8.1 per cent in 2010-11. Pace of capital formation is also expected to slip to crisis levels of 5.6 per cent. Indeed, even the latest industrial production figures with a meager 1.8 per cent growth for December, confirm the slowdown, with a worrisome de-growth of -16.5 per cent in the capital goods sector. While such moderation can in principle be tackled through demand augmenting policies, it leads to a strong possibility of reemergence of inflationary pressures once pent up demand from both consumers and industry show up. The service sector has again emerged as the prime mover; all the three broad groups under which the tertiary sector is classified in the national accounts statistics — trade, hotels, etc; finance, insurance etc; and community, social and personal services — are instrumental in pulling the real GDP up. Deceleration in the manufacturing and agricultural sectors, combined with a services sector growth is definitely inflationary. GDP deflator, a broad measure of inflation that includes services, has been estimated at 8.66 per cent, higher than the government/RBI’s estimate of 7 per cent WPI inflation by the end of March. Global food prices as per the FAO rose 1.9 per cent in January demonstrating the volatility in the international food markets; worries about weather conditions affecting 2012 crops in several major producing regions point to a further increase in February. Back home the agriculture, forestry and fishing sector is expected to record growth of just 2.5 per cent in its GDP during 2011-12, as against the previous year’s growth rate of 7.0 per cent. Within agriculture, the value of food grains production is expected to slow to 2.3 per cent as compared to 12.2 per cent in the previous agriculture year despite a record harvest of foodgrains, with new peaks in both rice and wheat production. This does not augur well for the supply-side. The Indian central bank has battled inflation through a high interest rate policy during the past fiscal and does not have much fire power left this time to tackle another surge in prices; indeed its rate reversal cycle may coincide with another bout of high global food price inflation. A production augmenting budget (and central bank policy) even if inflationary, is necessary for longer term development; this has to be backed-up by extremely prudent rationalisation and channelisation of subsidies to achieve the dual objectives of fiscal consolidation as well equitable distribution.

RBI addresses liquidity concerns; keeps key policy rates and inflationary expectations firmly anchored

Responding to an acute and prolonged liquidity crunch, the RBI in its recent Review of Monetary Policy has reduced the CRR (Cash Reserve Ratio, the amount of cash that banks have to mandatorily park with it) by 50 basis points from 6 per cent to 5.50 per cent of deposits, infusing about Rs. 32,000 crore into the banking system to mitigate the effects of net liquidity drainage from the system. For the last 4-5 months, commercial banks put together were borrowing Rs. 1-1.5 lakh crores on a daily basis from RBI. Since mid-October 2011, pressures on liquidity were acute despite injection of liquidity worth Rs. 70,000 crore, exacerbated by the forex market operations conducted by the Reserve Bank in response to a sharp depreciation of the Indian currency. This is indeed a reversal of the central bank’s policy stance as RBI notes that it considers the CRR as a monetary policy instrument with liquidity dimensions. However, RBI held its key policy rates unchanged (Repo: 8.5%, Reverse Repo 7.5% and MSF at 9.5%; SLR at 24.0%).

The country’s central bank’s decision making has turned even more challenging in recent months as the global economic scenario has worsened with Europe’s debt crisis pulling down growth and trade estimates across the globe. India’s domestic investment has also been on a downturn posing risk to future growth and has partially showed up in latest GDP as well as IIP numbers, leading to significant lowering of growth forecasts; the RBI has also slashed its growth forecast for the current fiscal from 7.6 per cent predicted in October to 7 per cent. Price pressures on the other hand have shown signs of moderating with lower pace of increase in the WPI in recent months, lower financial year build-up of inflation and dampening month-over-month seasonally adjusted annualised (3 month moving average) rate of inflation. However, the RBI’s commitment to a reversal in key policy rates is restricted by certain issues in inflation trends; the sharp decline in primary food inflation reflects high base and seasonal moderation together with moderation in global food prices with the FAO Food Price Index in December 2011 about 13 percent below its historical peak in February 2011. The RBI rightly feels that the comfort may fade fast if policy and administrative actions, which encourage investment that will help ease supply constraints in food and infrastructure, are not forthcoming and if the anticipated fiscal slippage, which is caused largely by high levels of consumption spending by the government and poses a significant threat to credible inflation management, is not adequately addressed.

RBI’s recent policy measure has been greeted well by markets, industry and analysts alike. Going forward, though the RBI’s bias is now stated to be doveish, the timing of the rate reversal cycle remains difficult to predict as it would clearly depend on inflationary trends; global inflation is likely to be moderating given the fiscal austerity driven demand deficiency around the globe, but domestic price pressures may yet resurge through either rupee depreciation, energy price pass-throughs or any expansionary (consumption demand augmenting) measures taken by the government without adequately addressing supply-side issues. The government’s response in the forthcoming budget is to be watched, however, whatever measures are announced would take some amount of time and will to execute. Thus the waiting and watching continues.