Centre’s optimism in tackling impact of meltdown

Ashok Dasgupta

Government hints at ‘aggressive’ easing of interest rates and ‘fast-tracking’ of pending reforms

NEW DELHI: The Central Government on Tuesday hinted at the need for “aggressive” easing of interest rates and “fast-tracking” of pending reforms as a strategy to mitigate the adverse impact of the severe global downturn on the Indian economy.

In its ‘Mid-Year Review 2008-09’ presented to Parliament as mandated by the Fiscal Responsibility and Budget Management Act (FRBM Act), the Government expressed “cautious optimism” in tackling the meltdown impact and argued that with the adoption of such an approach, the country’s economic growth was still likely to moderate, though only to about seven per cent this fiscal, while the inflation rate would revert to “normal levels” by March next year.

Enumerating India’s several strengths — as compared to other emerging economies — that can help mitigate the adverse effects of the global crisis, provided appropriate policy action is initiated, the Review said: “Having run a tight monetary policy during the first half of 2008-09, there is considerable scope for monetary policy easing over the next 6-12 months to offset the global increase in demand for money that is being transmitted to India. A pro-active monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing.”

Positive factors

Among the other positive factors that would lessen the severity of the impact were the country’s “relatively high share” of services in GDP (gross domestic product) that tend to be less affected by cyclical downturns, the five years of nearly four per cent farm sector growth and the high domestic savings rate of 36 per cent which led to nine per cent growth in past years. India also retained its position as a preferred destination for foreign direct investment (FDI).

Also, the ambitious programme of infrastructure investment designed for the XI Plan would provide the basis for offsetting some slowdown in corporate investment in manufacturing by increased investment in infrastructure by the Government and by the private sector through PPP (public-private partnership) projects. “This will require greater urgency in removing the policy and institutional hurdles to investment by private sector as well as government agencies,” the Review said.

Slower growth

Preparing the nation for a “significantly” slower growth in the second half of 2008-09 and a consequent lower GDP growth of seven per cent for the entire fiscal, the Review noted that the moderation from nine per cent in 2007-08 was owing to the crisis in industrialised countries which affected India’s external sector, including exports and capital flows.

With the introduction of Bills for reforms in the insurance sector, the Government appears to have already moved on to the “fast-track” to revert to 8.5-9 per cent growth. Clearly, the Government seeks to speed up the pending reforms to spur business sentiments in the wake of the global slowdown and moderation in domestic investment demand. The Review, however, concedes that while increased expenditure on infrastructure was a favoured option to spur growth, it would be difficult for the Government to adhere to the fiscal consolidation targets. “We may have to set aside fiscal consolidation target for the current fiscal,” it said.

As per the Budget 2008-09, the fiscal deficit was targeted at 2.5 per cent of the GDP, well within the framework of the Fiscal Responsibility and Budget Management Act but with the emergence of the financial crisis, that may now be wide off the mark.

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