Finance Minister Palaniappan Chidambaram called on Saturday for the Reserve Bank of India (RBI) to take "calibrated risks" to support the struggling economy as a reciprocal measure to government fiscal efforts.
In an interview with Reuters, Chidambaram said the government was committed to "fiscal correction", a nod to rating agencies that have threatened to make India the only BRIC nation with a junk credit status, even accounting for recent economic reforms.
Chidambaram was appointed in August to revive Asia's third-biggest economy back to its former glory. After growing close to 10 percent before the global financial crisis, years of policy inertia has slowed the rate of expansion to close to 5 percent and a deep budget deficit has put the country's credit rating in peril.
After loosening rules on foreign investment in retailing and airlines in a set of "big bang" reforms to kick start a revival in the economy, Chidambaram said it was now the RBI's turn to take action.
"It's a call that the RBI has to take," Chidambaram told Reuters on the sidelines of an International Monetary Fund meeting in Tokyo, two weeks before the RBI is due to review policy.
"But I hope that the positives outweigh the negatives and that while the government has taken and will take a number of fiscal measures, that these measures will encourage the RBI also to take what I call some calibrated risks."
The central bank has resisted pressure to cut interest rates since April, partly because of concern that inflation was too high and also because it wanted to see the government take action to lift growth, which was 5.5 percent in the April-June quarter, low by India's recent standards.
"Decision making in life is about taking risks. That's my view," Chidambaram said. "But I'm not the governor."
The minister might not get his way. Many economists expect the RBI to keep its main policy rate unchanged at 8 percent at an October 30 policy review.
The finance minister argued that India's sovereign credit rating should not be downgraded byStandard & Poor's Ratings Services (S&P) as the country's real and potential growth rates are higher than most countries.
He defended the country's subsidies programmes, saying that the government was making changes to decrease wasteful spending for some schemes but that some subsidies should not be eliminated for the sake of the country's poor.
Credit ratings agency S&P warned this week that, even with recent reforms, India faced a one-in-three chance of a downgrade within the next two years, which would put the country in "junk" status and make its debt less attractive to investors.
"Our actual growth and potential growth is way above advanced countries and the rest of the world, so I don't think we deserve a downgrade," Chidambaram said.
"We are a safe and attractive destination for investment."
Standard & Poor's ranks India at the lowest investment grade, with a negative outlook.
One challenge is curbing a budget deficit that a government panel warned last month had taken the country to a "fiscal precipice" and could hit 6.1 percent of GDP in the current fiscal year to March 2013. Another obstacle to fiscal consolidation is costly subsidies on food and fuel.
India's government is committed to policies to promote a "fiscal correction" and that by changing the way some subsidies are distributed the government could cut costs by 20 percent, Chidambaram said.
Regulatory uncertainty and policy gridlock have battered foreign corporate investment towardsIndia over the past year, adding to dramatic slowdown in growth.
Foreign direct investment into India has fallen 67 percent since the start of the current fiscal year in April after a record high the previous year. Investors pulled $1.93 billion from India in the second quarter, helping send the rupee to a record low.
It is too early to tell if the economy has bottomed out, but there are signs that foreign investment is returning to India, which is one reason behind a recent appreciation in the rupee, said Chidambaram.
Reforms announced over the past month have included raising the price of subsidised fuel to rein in the budget deficit, opening the retail sector to foreign supermarkets and relaxing foreign investment in airlines to help make structural changes to support growth.
A major obstacle to cutting rates is the level of inflation.
India's inflation has remained well above the central bank's March-end target of 7 percent. Recent fuel price rises to reduce subsidies are expected to add to inflationary pressures in coming months.
Data on Monday is expected to show that Indian inflation accelerated in September to its highest level this year, a Reuters poll shows.
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