Efforts to reverse growth recession

The new government after the election will be in a position to take important decisions for reviving the economy.

The measures taken by the UPA government and the Reserve Bank for arresting the recessionary trend have not yielded the desired results so far, as recessionary trends in the U.S., Britain, European Union and elsewhere have deepened. The steps taken by developed countries to revive their economies also have not borne fruit till now.

The new U.S. President Barack Obama is keen to stimulate the country’s economy and a relief package of $819 billion has been approved by the House of Representatives.

It is claimed that this package will be helpful in creating three million jobs in a few years. While it is expected that the relief packages formulated by various countries will have a favourable impact on the economies, the International Monetary Fund has lowered the growth of the world economy to 0.2 per cent in the current fiscal.

Industrial downtrend

It is against this background that the Indian economy has to bring about a reversal of the trends in industrial production noticed in October as well as the developments on the foreign trade front in October-November. The government is not in a position to grant fresh tax concessions or incur additional expenditure under various heads.

It has already announced numerous tax concessions and will be stepping up Plan outlay significantly. Non-Plan expenditure too will be increasing sizably leading to a big increase in revenue and fiscal deficits.

Parliament will be having its lame duck session this month. This is being convened only to secure votes on account after the presentation of the Railway and Interim Budgets for 2009-10. There will be no related budget proposals. Further concessions therefore cannot be granted by the present government. Indeed the revised budget estimates for 2008-09 will be carefully scrutinised by economic experts and others to determine how the substantial additional expenditure will favourably impact economic growth.

The monetary authorities also appear to be thinking along similar lines as in their latest exercise the three key rates have remained unchanged. The liberal refinance facilities extended to banks (excluding RRBs), non-banking financial companies, mutual funds and housing finance companies will of course be available till September end. A careful watch will be maintained on the emerging trends and appropriate decisions may be taken in the light of these trends.

Banks have liquidity

Liquidity in the banking system also is adequate in spite of a continuing outflow of forex funds. Foreign exchange assets have declined by $53 billion this fiscal up to January 16. The absence of any tightening in the money market is obviously due to the substantial release of immobilised funds by RBI and a satisfactory growth in bank deposits.

The banking system has ample funds at its disposal and bank managements should endeavour to extend credit liberally at lower rates.

Luckily for the government, the agriculture sector will be reporting good performance in the 2008-09 agricultural season, with foodgrains output rising to 233 million tonnes if not 235 million tonnes thanks to record wheat and rice crops.

Lower oil bill next year

The contribution of the services sector also may be slightly lower than in 2007-08, whatever be the actual growth in GDP, which may not be less than 6.5 per cent and may be even 7.5 per cent, according to Commerce and Industry Minister Kamal Nath. Inflationary pressures will be definitely under control as there has been a fresh cut in prices for three controlled petro products including LPG. There may be further lowering of these prices in the coming weeks. On present indications crude prices may be fluctuating around $45 a barrel until there are indications of a pick up in economic activity in developed countries.

In any event the Indian economy stands to benefit substantially as the outgo on the oil bill may be less than $70 billion in 2009-10.

With non-oil imports too likely to be cheaper, the trade deficit can contract significantly. If developments in this regard materialise and there is a reversal of the outflow of forex resources, the rupee may tend to appreciate against major currencies.

The Indian currency is now at a low level of 49 to a dollar as compared to the appreciated rate of 39.26 in October 2007. The new government after the election will thus be in a position to take important decisions for reviving the economy and lowering interest rates further. As stated earlier, the downtrend in foreign exchange assets may get reversed with an improved outlook for the economy.

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