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New govt may spend more to meet target

New govt may spend more to meet target
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First Published: Wed, Feb 18 2009. 01 15 AM IST

 Zero stimulus: Acting finance minister Pranab Mukherjee presenting the interim budget in New Delhi on Monday. The new regime will have to weigh up the benefits of sacrificing fiscal health for econom
Zero stimulus: Acting finance minister Pranab Mukherjee presenting the interim budget in New Delhi on Monday. The new regime will have to weigh up the benefits of sacrificing fiscal health for econom
Updated: Wed, Feb 18 2009. 10 52 AM IST
India may have dodged the banking crisis, but it hasn’t escaped the global slowdown. The government has opted not to announce any further economic stimulus measures in its interim budget. It’s leaving that decision to the winner of the upcoming general election, due by May. India’s new government will then have to weigh up the benefits of sacrificing fiscal health for the sake of keeping up economic growth.
Zero stimulus: Acting finance minister Pranab Mukherjee presenting the interim budget in New Delhi on Monday. The new regime will have to weigh up the benefits of sacrificing fiscal health for economic growth. PTI
India has not been hit hard by the global financial crisis. Heavily regulated banks have avoided the huge write-downs which have crippled Western financial institutions. India’s lack of exports, long considered a disadvantage relative to China, now looks like a strong point. As exports tumble, China is struggling to keep growth above 5%, down from 9% in 2008. India is expecting growth to shrink only to 7.1% this year from 9%.
But India’s relatively mild slowdown isn’t without pain. A lack of confidence has brought corporate lending to a near-standstill. Jitters over all emerging markets, along with margin calls, have prompted a flight of foreign capital from the country. India’s benchmark stock index has also plunged 37% in six months, helped on its way down by an accounting fraud at a leading information technology services company.
The worst pain might still be to come. The fiscal deficit of the national government is already running at 6% of gross domestic product (GDP)—twice as high as the government had hoped. Including individual state borrowings, the proportion is almost 10%. But any new government is likely to spend more, to help keep growth close to its target.
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India doesn’t have the foreign currency reserves to afford anything like China’s $600 billion (Rs29.52 trillion) mega-stimulus package. It has made an effort—lowering fuel subsidies and announcing a package of measures for small businesses. The total cost could be $8 billion, equivalent to almost 1% of GDP. Most of the stimulus has come from the central bank, which has cut policy interest rates and reserve requirements for banks.
India’s sovereign credit-rating is still investment grade, but a single downgrade would tip it into junk. The new government will have a hard choice: keeping up growth or maintaining some semblance of fiscal discipline.
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First Published: Wed, Feb 18 2009. 01 15 AM IST