New Delhi: India’s economic slowdown has been steeper than previously estimated and the challenge is to arrest it, but further fiscal stimulus will carry a cost, Reserve Bank of India Governor Duvvuri Subbarao said on Thursday.
His comments came soon after the government said it would tap markets for Rs2.4 trillion ($47.4 trillion) of borrowings in the first half of 2009-10, two-thirds of its projected record borrowing for the full fiscal year that starts on 1 April.
“Growth moderation is steeper than what we earlier thought and I believe 2009-10 is going to be more challenging year for us than 2008-09,” he told a business function.
The government expects Asia’s third-biggest economy has grown about 7% in the fiscal year that ends on 31 March, its slowest pace in six years, after growing at rates of 9% or more in the last three years.
Subbarao said steps taken to boost spending and activity were necessary in the current extraordinary situation, but cautioned there was a cost to further fiscal stimulus and more borrowings would put pressure on credit markets.
“I am sensitive to the fact that when credit demand picks up, private credit demand picks up, this is going to be more challenging but we will manage,” Subbarao said when referring to its management of the government borrowing programme.
“We will cross the river when we get to it,” he said.
The government’s finances have deteriorated sharply in 2008-09, weighed by a slowing economy, large subsidies, increase in salaries of civil servants and waiver or loans given to small farmers leading to a late rush of borrowings.
Gross borrowings for 2008-09 have more than doubled to Rs3.06 trillion this year since October, the central bank has slashed its main lending rate by 400 basis points to shield the economy from the global financial crisis and shore up activity.
Subbarao said 2009-10 would be a challenging unless business confidence and investment revived, and said cuts in policy rates needed to flow through to the broader economy.
Data released on Thursday showed the wholesale price index rose 0.27% in the 12 months to 14 March, the smallest annual rise in the history of the current series.
“We have responded appropriately and we will respond appropriately,” Subbarao said when asked if there was a case for monetary easing as inflation was near zero.
“We set the policy rates, but policy rates have to transmit through the banks,” Subbarao said.