29 Dec : By -S. Sethuraman :As India enters the New Year, amid the worst global economic and financial crisis in over seven decades, there is cautious optimism that its monetary and fiscal measures to counteract the external shocks would help the country maintain growth at not less than 7 per cent in 2008-09. Though moderating from the 9 per cent in 2007-08, India is likely to be still one of the fastest growth rates in a recession-hit world.
2008 posed extraordinary challenges for nations around the world, much more for India which had not only to tame the double-digit inflation in the first half of the fiscal year and moderate economic slowdown but also confront organised terror groups operating from across the Pakistan border. While the country has been put on a state of high alert after the horrendous terrorist attack on Mumbai’s famed hotels in the last week of November, the Government has remained focused on minimising the negative impact on domestic economy from the global crisis which is reflected in tightened credit markets, capital outflows, export slowdown and weakening business confidence.
Counter-cyclical measures have been initiated to stimulate domestic demand and revive investment activity so as to prevent large-scale job losses. The coming fiscal year (2009-10) will prove tougher for the world economy as USA, European Union, Japan and other industrial countries having already entered recession. Growth estimates for all emerging economies including China and India have also been revised down. The global slump was precipitated by the financial market turmoils leading to choking of credit flows, which has affected manufacturing and service sectors in all countries. With investors becoming risk-averse, a sharp reduction in capital flows and contraction in world trade are forecast for 2009.
Inflation Eases For Stimulus
A major relief for India and other developing countries has been the steep fall in prices of oil and other commodities including food and metals, which helped to bring down inflationary pressures worldwide. The Reserve Bank of India(RBI) had tightened monetary policy when inflation surged toward a double digit but by October, it began reversing the gear to pump Rs.300,000 crores of liquidity into the banking system to provide credit for productive sectors. The reserve ratio and key interest rates were being steadily lowered as inflationary pressures started easing. The annual rate of inflation had fallen to below 7 per cent at the beginning of December.
Thus, fall in prices, credit availability and reduction in interest rates, should generate confidence for large and small industries, services and other sectors of economic activity. At the same time, given the need for a right policy mix to steer the economy through a crisis situation not of its making, The Government had been making cuts in customs and excise duties to reduce costs for producers to enable them to remain competitive, and has enlarged public spending by Rs.147,000 crores through supplementary grants voted by Parliament.
In addition, the Government and RBI announced special measures to assist exporters as well as seriously-affected sectors which are labour-intensive like textiles and garments. Improved credit access with interest rate concessions would cover areas including small and medium industries (which account for over 90 per cent of the work-force), housing and other construction sectors. Funding is being accelerated for the severely stressed social and physical infrastructure, a basic requirement for sustained economic growth.
Moderate Growth Prospects
With prospects of global recovery not in sight until the end of 2009, both the Government and RBI are closely monitoring the trends, domestic and external, to take additional measures as needed to maintain the tempo of development and prevent any dislocation in the growth process. The mid-year review (2008-09), presented to the Parliament by the Finance Ministry, says after a robust rise at 7.8 per cent in the first half, GDP growth would be “significantly lower” in the second half because of weakening domestic demand and private investment. Though at current rates of savings and investment, it should be feasible to secure a 7 to 8 per cent growth, the review says, “we have to be prepared for growth to be around 7 per cent in 2008-09 as a whole”.
The review has suggested further monetary policy easing over the next 6 to 12 months for which there is scope with the faster than expected decline in inflation, which could go down to 4 to 5 per cent by March next. The Planning Commission will take into account the need for continued fiscal stimulus for growth in 2009-l0 while formulating the Annual Plan.
Strengths for Economy
India’s strengths in relation to other emerging economies include a higher share of services (than manufacturing which has suffered slowdown) in the economy, the rise in domestic savings to 36 per cent of GDP by 2007-08 and its growth being driven by investment and consumption, investment being domestically financed except for a small share of external savings (1.5 per cent of GDP). Thus, the macro-economic impact of the global shake-up should be relatively muted.
The food position should remain comfortable as agricultural prospects in the current year are fairly bright, especially for the Rabi crop, after the record food production in 2007-08 at 230 million tonnes and the high levels of food procurement and stocks. The economy looks like riding out of the inflationary pressures soon, the relatively rapid fall being greatly helped by the fall in international oil and other commodity prices. This could create some fiscal space with a reduction in major subsidies and the oil price fall could also help to keep down the trade deficit during the current year.
However, the tightened global credit markets are for the present affecting capital flows with investors seeking safer assets like US Treasury securities. There was an outflow of portfolio capital of 13 billion dollars but the first half of the year also saw higher inflow of foreign direct investment of some 17 billion dollars. Though foreign exchange reserves had to be drawn down in the first nine months (April-December), for RBI to meet the economy’s dollar requirements, the level of reserves at 254 billion dollars mid-December provide a strong cushion to meet external obligations.
Near-Term Fiscal Outlook
Given the current economic slowdown, some deceleration in revenue growth is likely in the next few quarters, especially with a perceptible decline in aggregate demand in the domestic economy. But rising Plan and Non-Plan expenditures plus counter-cyclical measures would impose burdens on the budget. These include the Sixth Pay Commission recommendations, farm debt waiver, increase in major subsidies and the impact of tax and other concessions in the stimulus package. Both revenue and fiscal deficits are expected to exceed the budgeted 1 and 2.5 per cent of GDP respectively and the stimulus measures alone would be equivalent to 2 per cent, according to the review. Thus, the Centre’s fiscal deficit would be of the order 5 per cent of GDP in 2008-09.
To continue with fiscal consolidation, interrupted by the economic slowdown, India would need to seek an early return to its growth trajectory of 8-9 per cent to be able to finance growth in public expenditure. India could resume this growth path once there is restoration of confidence in the global financial markets with a revival of credit flows and bottoming out of US recession, the review says and calls for policy reforms to be accelerated, including greater private access to infrastructure development to generate domestic demand.