Washington/New Delhi: As India unveils Budget on Friday, the International Monetary Fund has prescribed that fast-growing emerging markets can start withdrawing stimulus packages so that large public debt could be reduced.
The advice is similar to the one offered by the Economic Survey and the Finance Commission to the Indian government.
“Fast-growing emerging markets can start tightening now,” the multilateral lender said in a statement on Wednesday.
It noted that the financial crisis has resulted in rise in public debts and called for strategies to reverse the trend.
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“As the crisis winds down, it is now more urgent that policymakers formulate, communicate and begin to implement strategies for exiting from crisis-related intervention policies,” the IMF said in its paper ‘Exiting from Crisis Intervention Policies´.
The Economic Survey tabled in Parliament has recommended a gradual roll back of stimulus.
“...The broad-based nature of the recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last 15-18 months... so as to put the economy back on to the growth path of nine per cent annually,” the Survey said.
The 13th Finance Commission has asked the government to adopt a “calibrated” strategy for withdrawing stimulus.
Last week, the Prime Minister’s Economic Advisory Council had also suggested partial roll back of stimulus measures.
Pointing out that bringing down public debt would involve
difficult choices, the IMF said that removal of stimulus measures could be done in a phased way, with fiscal measures being unwound ahead of monetary policy.
It said that governments should start withdrawing stimulus ahead of the central banks tightening money supply.
“The reality is that one more year of deficits is much more costly than one more year of low interest rates. So when the choice is available, fiscal exit should come first, monetary tightening second,” an IMF official was quoted as saying in the statement.
In India the RBI has already started squeezing money supply but the government is yet to start rolling back stimulus.
Meanwhile, the IMF has cautioned that advanced countries should keep their interest rates at low levels unlike the emerging economies.
“... because of the higher growth in emerging markets, interest rates in those countries would probably be higher, but advanced economies should not be tempted to follow suit and should in general still keep interest rates low,” the statement noted.
The US has been maintaining its benchmark rate in the range of 0-0.25 per cent for more than a year, to bolster the national economy.
According to the IMF, a new financial regulatory framework and more capital would be needed to reduce the risks ensuing from the unwinding of crisis-related financial policies.