It's status quo for economy as govt rules out stimulus

As the developed nations stare at a re-emerging economic slowdown and debt crisis, India has decided to wait and watch. The government does not have any immediate plans to stimulate the economy to avert a slowdown. Neither is it contemplating any action that could seem a knee-jerk reaction to the global developments.

The situation this time is different from 2008-09, when the government cut duties and increased public expenditure to protect the economy from the ripple effects of a recession in the US. Currently, neither does the government see any adverse effect of the global situation on India, nor has it much scope to stimulate the economy, given its tight fiscal condition. Industrial activity has slowed and there are fears of a shortfall in tax collections and revenue from disinvestment.

Moreover, it is battling its biggest problem for the last few months — inflation. A positive impact of the global slowdown on the Indian economy may be that easing commodity prices will help to moderate inflation. Also, it may prompt the Reserve Bank of India to put a pause on its rate increase cycle, and change the policy stance, which has continued to be anti-inflationary for the last 16 months. The central bank has increased policy rates 11 times since March 2010.

Finance ministry officials told Business Standard it would take some time to properly analyse the situation, but it did not appear to necessitate an urgent policy intervention or strategy planning. “We don’t want people to overreact. You cannot do much here. There is no need to give any stimulus at the moment. We have seen how other countries are paying for their reckless spending. Stimulus has to be given in a measured way. You can’t keep on increasing expenditure,” said an official.

The Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan, has also ruled out a need to stimulate the economy unless the US slipped into a recession. He, however, cautioned that if the recovery was slower than expected it would have implication on capital flows and exports.

“There is no immediate impact on India. Stock markets may behave better in the coming days. India will be able to grow at 8.2 per cent. Downside risk arises if there is a recession in developed countries, but I don’t think that will happen. At this moment, nothing is warranted,” Rangarajan explained. “Policymakers need to watch capital flows and trade flows.”

The finance ministry is currently in a fiscal consolidation mode, after committing a huge expenditure last time to stimulate a slowing economy. India’s fiscal deficit had ballooned to 6.6 per cent of the gross domestic product (GDP) in 2009-10, as the government spent more to deal with the global financial meltdown. For the current year, it has set a target of reducing the fiscal deficit to 4.6 of GDP.

In fact, the government has not yet fully withdrawn the stimulus given in 2008-09 and 2009-10. Excise duty, which was brought down from 14 to eight per cent, was later increased only to 10 per cent. A two per cent cut in service tax has not been rolled back yet. It could not restore the duties to the earlier levels as inflation was ruling high and manufacturing activity was not going at full throttle.

“As it is, inflation is so high and any increase duties would hurt the industry and impact growth,” said a finance ministry official.

On Saturday, Finance Minister Pranab Mukherjee also assured that economic stakeholders had no reason to fear introduction of any regressive policy measures. He said there were no proposals for introducing dual pricing for diesel or increase in duties for bridging any perceived shortfall in tax revenues.