Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Home-page / Govt sees room for monetary policy easing
BackBack

Govt sees room for monetary policy easing

Govt sees room for monetary policy easing

Premium


New Delhi: India’s finance ministry called for an “aggressive" easing of the country’s monetary policy to fight a potentially worsening economic downturn worldwide and a resulting slowdown in domestic manufacturing, even as it renewed the call for more economic reforms.

Also See Critical View (Graphic)

In its so-called mid-year review for 2008-09, the ministry warned that India’s economy was poised to slow and that there would be substantial slippage in annual fiscal deficit targets.

Crisis management: Chief economic adviser Arvind Virmani. PTI

In the review presented on Tuesday in Parliament, the government said that the general outlook of the economy in the short run and for 2008-09 continues to be one of “cautious optimism".

Though the gross domestic product (GDP) grew 7.75% during the first half of the year, economic growth is expected to be “significantly lower" in the second half due to the impact of slower export growth, weaker domestic demand as well as possible slackening of private investment.

The review maintains that there is chance that the growth rate may decelerate to 7%, the lowest official projection so far.

Click here to watch video

22b3de7a-d107-11dd-a8e6-000b5dabf636.flv

“Having run a tight monetary policy during H1 (first half) 2008-09, there is considerable scope for monetary policy easing over the next 6-12 months," the finance ministry said in the half-yearly review, which is mandated under the Fiscal Responsibility and Budget Management Act (FRBMA). The Reserve Bank of India (RBI) lowered the benchmark repo rate by 2.5 percentage points to 6.5% in three cuts from 20 October to 6 December.

While the review favoured frontloading some of the public expenditure in infrastructure approved for the 11th Five Year Plan (2007-12), it also called for exploring the possibility to stimulate private investment in infrastructure development, “given the general slow pace of project implementation or capacity to scale-up capital expenditure in the public sector".

The government recently approved an additional expenditure of Rs42,480 crore during the current financial year. It includes the Rs20,000 crore fiscal stimulus to spur industry as well as domestic demand.

Commerce minister Kamal Nath said on 11 December that the government may announce a second stimulus package to assist exporters. Prime Minister’s economic advisory council chairman Suresh Tendulkar, however, was quoted by Reuters news agency, as saying that the government needed to see the impact of its first stimulus package.

“We are seeing some teething problems in the implementation of the first package. The second stimulus package will depend on the response to the first one," he was quoted as saying.

The review observes that under current circumstances, it may be difficult to adhere to the FRBM targets for the current fiscal at 2.5% of GDP with a headroom of 0.5%. Chief economic adviser Arvind Virmani said that “the additional fiscal stimulus provided in 2008-09 may be of the order of 2% of GDP over the benchmark fiscal deficit (target) of 3% of GDP." In other words, the fiscal deficit could exceed 5% of GDP.

The government has already sought an additional expenditure of Rs1.47 trillion from the Parliament, as the first and second batch of supplementary demands for grants, raising public spending to Rs9 trillion from Rs7.5 trillion, originally envisaged in the budget for 2008-09.

The review maintains that risks to India’s economic growth from the turbulence in the external sector are minimal as Indian growth remains largely domestic-driven and it has a diversified export market.

“The meltdown in global commodity prices led by a decline in crude and food prices would help bridge the current account deficit. While this might ultimately feed into the growth process through lower input costs and improvement in corporate profit margins, the resilience of the Indian economy lies in the predominant domestic nature of financing with net external demand playing only a complementary role," it said.

As a result of drastic decline in global crude oil prices, the downside risk on current account deficit has also receded, the review said, thus offsetting the negative impact of slowdown in exports in overall trade deficit. While in October, exports shrank 12%, crude oil price declined below $40 per barrel on Tuesday from its July peak of $147 per barrel.

On the price situation, Virmani said that “headline inflation will return to the normal level of around 5% by March, 2009," with sharp decline in commodity and oil prices. Wholesale Price Index based inflation declined to 6.84% for the week ended 6 December, the lowest in nine months, due to a cut in administered fuel prices by the government. The Reserve Bank of India has said it aims to bring annual inflation down to 7% by the fiscal year-end on 31 March.

Liz Mathew and Sanjiv Shankaran of Mint, and Reuters contributed to this story.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 24 Dec 2008, 12:06 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App