India, today, cautioned G-20 nations against rushing to withdraw stimulus measures, although many countries were seeing the worrying trend of expenditure far outstripping income.
Finance Minister Pranab Mukherjee, who initiated gradual roll back of stimulus measures back home in the Budget for 2010-11, said that withdrawal of fiscal and monetary props, all at the same time, could derail the fragile economic recovery.
"The market is sending strong signals that the fiscal situation is a matter of concern...We should all not rush to fiscal (stimuli) exit at the same time so as not to undermine the recovery...," he said at the G-20 Finance Ministers meet here.
India had unveiled a number of fiscal and monetary sops to insulate the domestic industry in the wake of the 2008 global financial crisis, but rolled back some of them such as excise duty cuts after the economy posted healthy growth.
The economy expanded by 7.4 per cent in 2009-10 from 6.7 per cent in 2008-09, the year that bore the brunt of the global crisis. India's fiscal deficit is pegged at a high 5.5 per cent of GDP this fiscal, but the government hopes to reduce it to 4.5 per cent in 2011-12 and 4.1 per cent in 2012-13.
High fiscal deficit makes borrowings costlier for the industry and in turn impact their investments , key to economic growth, at a time when public spending itself is strained because of poor government finances.
"Those countries that have market compulsions may need start the consolidation now. Others can stagger in fiscal consolidation. It is critical, however, to clearly lay down credible and transparent fiscal consolidation paths," Mukherjee said at the meeting called to discuss the global financial crisis and ways to regulate financial institutions.
The Reserve Bank of India (RBI) too has signalled exit from monetary stimulus and has raised key policy rates twice this year to put the lid on inflation.
Mukherjee also warned the countries that they should exit from stimulus before the markets started forcing them on account of deterioration in fiscal conditions.
"And, we need to act before the market forces us to do so. I may point out that fiscal deterioration is a natural corollary of deep and protracted recessions and downturns as governments try to stimulate the economy back to their true potential," he said.
This entails ceding some control to markets that have to fund the high deficits. Fiscal consolidation is a natural corollary of the recovery process, as countries can only grow their way out of high levels of public debt, he said.
Mukherjee said monetary policy instrument was not very effective on account of continuing instability in financial markets and underlined the need of structural reforms to raise global economic growth, which is facing a fresh threat from rising debt of some countries in Europe.
He said reforms must be seen as creating jobs for wider acceptability since much of the revival in the economies around the world has been jobless.
High fiscal deficit and resultant high debts of the governments has resulted in deep financial problems surfacing again after global financial meltdown in 2008. This has happened particularly in Greece, and experts are divided whether this contagion will spread to other parts of Europe.
"However, even as we were deliberating the framework and the global economic recovery was getting a foothold, we now seem to see the beginnings of another crisis. This underscores the importance of urgently addressing various imbalances that exist in our economies, both external and internal," the Indian Finance Minister said.
Mukherjee also highlighted the importance of structural reforms as the single most effective policy tool for addressing imbalances and raising growth. "Such reforms however entail building domestic political consensus in our countries as there can be short term pain."
"I fear that they cannot be sold unless they are seen to be creating jobs on a vast scale, as much of the recovery has been jobless in several parts of the world. I suggest that while we need to be ambitious, we need to calibrate the steps for greater acceptability," he added.