New Delhi:The country’s growth is seen slowing to 6.5% in the fiscal year that ends on 31 March, below the official forecast of around 7%, and there is room for more monetary easing, Planning Commission deputy chairman Montek Singh Ahluwalia said.
“One of the advantages going into next year is that we have a lot of room in the area of monetary policy,” he told reporters on the sidelines of a business function on Tuesday.
“That is an area where we still have room,” Ahluwalia said, adding that many other countries don’t have that headroom as they have lowered their interest rates to near zero.
Headroom: Ahluwalia says there is still scope for cuts in the repo rate. Scott Eells / Bloomberg
Since last October, the country’s central bank, the Reserve Bank of India (RBI), has cut its main short-term lending rate by 400 basis points to stimulate flagging growth. Still, after the latest half percentage point reduction this month, the repo rate, or the rate at which RBI injects money into the financial system or lends money to banks, stands at 5% leaving scope for cuts.
Ahluwalia said his growth estimate was arrived at after simulating the effect of the global recession, drop in investment, falling exports and lower oil prices, and reflects a sharp fall from 9% or more rise in the past three years. “The net result of that is that growth will be somewhere around 6.5% or something this year.”
Economic expansion in India is seen dropping below 6% to a seven-year low in 2009-10, a Reuters poll had showed last week. The global economy is expected to shrink as much as 1% this year—its first contraction since World War II—below a January projection of around 0.5% growth, the International Monetary Fund had said last week.
“In the rest of the world, it is very clear 2009 will be worse than 2008, and those are calendar years. Our objective is for the fiscal year 2009-10, we should try to do at least as well as we did in 2008-09,” he said.
Ahluwalia said there may be need for another fiscal stimulus package.
India’s fiscal deficit is expected to be around 10% of the gross domestic product, one of the highest in the world and analysts expect it to rise more as tax revenues fall due to the economic slowdown.
“I would still argue that in spite of the high fiscal deficit, there is a case for an additional fiscal stimulus in the present circumstances for the next year,” he said.