With budgetary preparations on in full swing, the Reserve Bank of India (RBI) today advised the Finance Minister to at least partially rollback the stimulus that was provided to help the industry cope with the financial crisis.
"For short-term economic management and medium-term fiscal sustainability..., it is imperative, that the government returns to a path of fiscal consolidation. The consolidation can begin with a phased roll back of the transitory components," RBI Governor D Subbarao said while unveiling the third quarterly review of the monetary policy.
RBI's advise has come at a time when Finance Minister Pranab Mukherjee is busy preparing the Budget for 2010-11 to be unveiled on February 26 in the Lok Sabha.
The government had announced three stimulus packages, envisaging a revenue sacrifice of Rs 1.86 lakh crore, to help the economy fight the global financial crisis that followed the collapse of Lehman Brothers in September 2008.
The stimulus measures, which mainly included excise duty cuts and increase in public spending, were aimed at generating demand for industrial goods.
These initiatives, in addition to the steps taken by the RBI to unlock liquidity to help cash-starved industry, helped the economy to clock 7.9 per cent growth during the second quarter (July-September 2009-10).
However, the tax cuts and higher expenditure are slated to push up the fiscal deficit from 6.2 per cent of GDP to 6.8 per cent during 2009-10, considered as unsustainable by experts.
Growing confidence in the economic recovery, Subbarao said, "Justifies our moving further in reversing the crisis-driven expansionary stance."
Noting that the main policy rates at current levels were more consistent with a crisis situation than with a fast-recovering economy, he said, "It is necessary to carry forward the process of exit further."
Subbarao also underlined the need for greater coordination between the monetary and fiscal policies for the economy to be more effective.
"It's important that there is coordination in the fiscal and monetary exits. The reversal of monetary accommodation cannot be effective unless there is also a roll back of government borrowing," RBI chief added.
Pointing out that the government borrowings increased significantly and abruptly during 2008-09 and 2009-10, the Governor said, "Liquidity infusion options will not be available to the same extent next year (2010-11)."
Moreover, he added, there would be additional constraint on resources with the likely pick up in private sector credit demand.
