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Fiscal stimulus is far more than spending packages, says Montek

Special Correspondent

Widening of fiscal deficit will continue in 2009-10; quality of stimulus is important

— PHOTO: K.V. SRINIVASAN

Planning Commission Deputy Chairman Montek Singh Ahluwalia accepts the “For the Sake of Honour Award” from the Rotary Club of Anna Nagar in Chennai on Thursday. At right is the Club president K. Rajagopal.

CHENNAI: The government’s fiscal stimulus to deal with the economic slowdown is far more than just spending packages, according to Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission.

Instead, it is everything that contributes to the widening of the fiscal deficit this year. Including the Central and State deficits, this is expected to rise to 10 per cent of the gross domestic product (GDP), he said on Thursday.

“It’s not that we are being mealy-mouthed. We’ve actually done a lot,” he said, responding to fears that the two stimulus packages announced by the government were inadequate. “What effect that will have, we will have to see.”

Mr. Ahluwalia was speaking at a meeting of the Rotary Club of Anna Nagar here, where he was presented with the “For the Sake of Honour Award” by N. Ram, Editor-in-Chief of The Hindu.

The fiscal deficit for 2007-2008 was three per cent of the GDP, Mr. Ahluwalia said. The Finance Ministry’s mid-year review indicated that this year’s deficit would be more than five per cent of the GDP.

Adding the oil and fertilizer subsidy bonds, which are not shown in the budget deficit, as well as the lower revenue expected due to the impact of the economic downturn on profits, he estimated that the real deficit would be much higher this year. “I won’t be surprised if we add three percentage points or even a little more,” he said, estimating a final figure of 6.5 per cent of the GDP.

With the State governments being authorised to increase their deficits from three to three-and-a-half per cent of the GDP, the total would add up to 10 per cent of the GDP, he explained.

This widening of the deficit would continue in 2009-10. “The need for the fiscal stimulus won’t end with the current year,” he said. With elections coming up, the next government should be aware that it could not go back to a fiscal deficit of three per cent in its first year. “If we get an average growth rate of seven per cent for the next two years, then we must get back to the path of fiscal prudence and discipline.”

Focus on infrastructure

However, Mr. Ahluwalia emphasised that the quality of the stimulus was important. “We need to use the opportunity to create the kind of stimulus that will do the most to get us out of the current situation,” he said, explaining why much of the stimulus packages was focussed on infrastructure. Both public-private partnerships and government investment would be encouraged, with public expenditure focussed on irrigation, housing for the poor, rural roads and urban infrastructure.

Mr. Ahluwalia expected the global economy to begin recovery by 2010. “In the long run, there is no doubt that the relative attraction of India to the industrialised countries will be very high. If they get out of the recession, they will be lucky to grow at 1.5 per cent, while we can expect a growth rate above seven per cent,” he said. With the discrediting of the speculative instruments that led to the downturn, more investment would flow into economies such as India which would show real returns, he predicted.

Mr. Ram praised Mr. Ahluwalia for not losing touch with his theoretical moorings as an economist, even while gaining importance as a policymaker.

With the Finance portfolio now under an “overburdened” Prime Minister, it was no coincidence that Mr. Ahluwalia presented both stimulus packages, he said.

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