It is possible, as some have argued, that bond markets shouldn’t focus just on the central government’s fiscal slippage—in both FY18 and that estimated for FY19—but also look at the borrowings of the states. After all, thanks to the assured 14% growth in tax collections assured to them under the GST formula, states will borrow less than anticipated—if this happens, on an overall basis, bond markets will find the borrowing increase will be a lot less. At the same time, however, there are other worries, and not just those relating to the price of oil. There are the worries that the Centre will not be able to meet its aggressive revenue projections for FY19 and that, especially due to oil prices, the FY19 GDP growth estimates could go wrong; the final costs of the government’s health package is also not quite clear and remains a bit of an imponderable.
Much more worrying, however, are the large number of imponderables as far as central expenditure are concerned. As this newspaper first highlighted, it is not clear if the promised hike in MSPs will be based on the lower A2+FL costs or on the higher C2 costs. Since many crops already have an MSP that is more than 1.5 times the A2+FL, offering this to farmers can’t possibly be the game changer the FM promised. So, even if it is not C2, it could be some combination, and no one is quite sure what that will be. The problem gets worse after this. The government has promised that, once the MSP is announced, all farmers will get compensated if the government is not able to procure their crop at the MSP.
This is completely open-ended and, as it happens, lends itself to a lot of market manipulation—if traders collude to lower market prices, as is said to be happening already in Madhya Pradesh which offers such deficiency payments, the government payouts could rise dramatically. Since both the MSP and the deficiency payments can be quite inflationary, the monetary policy committee may be quite hawkish in its commentary, even if there is no rate hike after it completes its deliberations.
In retrospect, critics of RBI’s monetary policy, such as this newspaper, have to agree the central bank was more prescient when it came to the possibility of oil prices rising significantly, the fisc slipping out of control—whether it has any bearing on inflation is another discussion—and, most important, the possibility of a sharp hike in MSPs, especially in an election year.