Although there are some definite signs of recovery in many countries, it might be premature to conclude that the global economic crisis has ended or is even near its end. There is little doubt that, but for the extraordinary policy interventions through monetary easing and fiscal stimulus packages, the crisis would have assumed far more menacing proportions. There is a growing consensus that these measures cannot remain in place indefinitely but the question is when the re versal of course should begin. Central banks and governments have been articulating the need for a planned exit from the policy positions, whose continuance might push their indebtedness to unacceptable levels or stoke inflation. In India, after three fiscal stimulus packages, the government thinks there is no need for additional ones. The huge increase in the budgetary outlays on social sector programmes is expected to sustain rural demand. Significantly, the Finance Minister has said he would return to fiscal consolidation as soon as it is feasible. On the monetary side, the Reserve Bank of India Governor has said the special monetary accommodation needs to be rolled back, subject to two conditions being fulfilled. First, a road map for fiscal consolidation is put in place and, secondly, there are more definite signs of recovery.

With the threat of a further deterioration in the global economy abating, attention is turning to the inherent contradictions between monetary prudence and fiscal deficits that have surfaced, despite the governments and central banks coordinating their actions closely. Central banks have lowered their policy interest rates substantially, to near zero in many countries. However, monetary transmission, in times of crisis, is simply not adequate. Central banks responded through a slew of measures, described variously as quantitative and credit-easing. Since even these failed to revive credit markets, governments were forced to intervene through large fiscal packages. Financing them has not been a problem so far: the extreme risk aversion has triggered a flight of investors to the safety of government securities. RBI Governor D. Subbarao has said there could be a price to be paid for the large expansion in the balance sheets of central banks. In India too, there is need for a judicious balance between short-term compulsions and medium-term sustainability. Large fiscal deficits will fuel inflation even if that may not be an immediate worry. The challenge is to maintain liquidity while anchoring inflation expectations.


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