Finance Minister Pranab Mukherjee on Wednesday maintained that even as the fight against inflation was hurting corporate investment and industrial growth, the Government is left with limited options to combat the slowdown owing to the deteriorating global economic environment.
In his inaugural address at the Delhi Economics Conclave, Mr. Mukherjee pointed out that major economies all over the world, particularly those in Europe, are yet to emerge from the slowdown following the global financial crisis in late 2008 and this has been the state despite the aggressive use of fiscal and monetary tools.
“All these [slowdown and other attendant ills] have happened despite the aggressive use of both fiscal and monetary policy tools... it poses a serious problem for policymakers. Going forward, it limits our options in dealing with the emerging situation,” he said.
With the Reserve Bank of India (RBI) yet to effectively tame high inflation despite the 13 key rate hikes since March 2010 and which instead has impacted corporate investments and stunted industrial growth, Mr. Mukherjee noted such a situation was “partly a reflection of global trends, but our own fight against inflation has also taken a toll on investments by our corporations”.
“Sustained high inflation that has been a major policy concern for us over the past two years is now beginning to moderate...Growth, however, has slowed in 2011-12...We must turn our attention now to reviving growth as quickly as possible,” Mr. Mukherjee said, perhaps hinting at what action the RBI is likely to put in place during its monetary policy review on Friday this week.
Expressing concern over the sharp depreciation of the rupee which touched a fresh all-time low of 53.72 against the US dollar, Mr. Mukherjee said, “While the Indian economy experienced excessive capital inflows in the aftermath of global crisis leading to appreciation of the domestic currency, with the unfolding of the euro zone crisis, the matter of concern at present is reversal in such flows leading to increased currency volatility.”
Yet, the Finance Minister maintained that in some ways, the Indian economy was “better placed than many other nations”, especially when the country's fiscal challenges, in the form of public debt or size of fiscal deficit, “are nowhere as large as the ones faced by many European nations”.
Alongside, however, he was quick to note that this observation should not be taken otherwise. “I say this not to encourage complacency in India but to place the issue in perspective. I am expecting that the present downturn will be temporary and our economy will soon revert back to high growth,” he said.
Turning focus to the highly uncertain global scenario, Mr. Mukherjee pointed out that the current build-up of concerns has been incremental in nature with a series of local intermittent shocks getting transferred to the world economy. “All this has happened despite the aggressive use of both fiscal and monetary policy tools and our collective resolve to keep markets open. This poses some serious problems for the policy makers. Going forward with it limits our options in dealing with the emerging situation,” he said.
Mr. Mukherjee underscored the need for sound economic policies at the present juncture as even the “tepid” economic recovery in advanced economies was getting stalled. “While new opportunities await us in the near future, we must recognise that sound economic policy making is must for realising them,” he said.