P. Chidambaram with economic affairs secretary Arvind Mayaram in New Delhi on Wednesday. (PTI)
New Delhi, Dec. 11: The government plans to achieve fiscal consolidation by cutting down on subsidies and spending, busting inflation and ringing in financial sector reforms, finance minister P. Chidambaram said today.
“At the top of the list is fiscal consolidation. Next is tackling inflation. The last is financial sector reforms, (which) can be game-changers,” Chidambaram said at a function also attended by RBI governor Raghuram Rajan.
Both Chidambaram and Rajan warned that reforms might remain hostage to politics. Global rating agencies have also warned that India’s credit rating may be downgraded to “junk” if the government is unable to implement reforms.
“If it is a hung Parliament (after general elections in 2014) or if the government is unable to effect reforms, definitely by implication the rating will come under pressure,” said Terry Chan, credit analyst at Standard & Poor’s, during a teleconference with reporters.
The finance minister did not comment on the S&P statement but said political consensus necessary to pass financial reforms such as the goods and services tax, Direct Taxes Code, Insurance Laws Amendment Bill and Uniform Financial Code was often tenuous with “consensus built after several months of hard work… crumbling when hit by a seizure of political opportunism.”
This is being seen as an indication that the Congress will continue to try to pass financial reforms but does not have high hopes of pushing them through in the ongoing session of Parliament.
However, Chidambaram made it clear that his government would not be swayed by populism and would stick to fiscal prudence. The statement is expected to soothe investor nerves. “There can be no compromise — and I speak for the government when I say there will be no compromise — on the decision to walk on the path of fiscal prudence and contain the fiscal deficit.”
There are concerns that after losing in four states, the UPA government may embark on a host of populist schemes to win back voters.
Consumer inflation has remained high at 10 per cent during November, while wholesale inflation is likely to have risen 7 per cent. The figures are expected to be officially released later this week, leading to market speculation that the RBI may raise interest rates to contain price rise.
“It is common knowledge that the government will pay a price for high inflation, especially if inflation persists over a long period,” Chidambaram said, indicating that his government intended to take more steps to roll back prices.
The import of onions during September-November have already seen its price tumble to a third of the peak rates about two months back.
The finance minister said monetary policy was a “blunt instrument,” and that the government would need to tackle the structural bottlenecks that kept food prices high.