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Last updated: 26 Sep, 2014  

Rupee.9.Thmb.jpg Getting ready for a tight monetary policy

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Ashok Handoo | 20 Nov, 2009
The recent statements by the Prime Minister and other leaders, at the national and international fora, about India’s current economic status have one common thread – that the Indian economy is recovering fast and it is time we begin thinking about rewinding the stimulus packages we have been pursuing for the last one year to pump liquidity into the system in view of the global meltdown.

Whether and when it will done will continue to be debated for some time. But, the very fact that we have started talking about it reflects that things have, indeed, started looking up—much before the western world has been able to do. View this in the backdrop of the stand taken by the G-20 countries just a few days ago to continue with the fiscal stimulus measures, as the time is not ripe to think of a roll back, you have the answer where we stand.

The Prime Minister Dr. Manmohan Singh has made it clear that steps for an exit strategy would be taken by the end of the current financial year. The Finance Minister Pranab Mukherjee too has been saying that the stimulus packages would continue only until these are required.

The first indication of such a thinking was given by the Reserve Bank of India when it  raised the Statutory Liquidity Ratio (SLR) of the banks by one point –from 24 to 25- in a bid to reduce their liquidity, last month. But the fact that it left all other key indicators like the repo rate and the reverse repo rate untouched, shows that the RBI does not want to go too fast with it  and risk to send a wrong signal in the process.

As of now, the stimulus packages are to continue as the economic indictors do not signal a complete turnaround. Until the economies of the developed countries recover from the global meltdown, India too will continue to be affected.

It is precisely for this reason that the finance minister has been stressing the importance of focusing on domestic demand till the world economies are out of the woods. Fortunately, we in India, have a strong domestic demand and this coupled with as high as 35 percent savings rate, is enabling us to face the global downturn in a much better way. At a time when the richest economies of the world are squeezing, India has been able to grow at 6.7 percent last year and hopes to record 6.5 percent growth in the current financial year, in such adverse conditions. It hopes to raise the growth level to 7 percent next year and get back to 9% or more trajectory, soon after.

It is in recognition of this situation that the policy of massive investments in the fields of agriculture and infrastructure continues to be the guiding principle. That is required not only to generate demand but also to provide employment- the two important factors that keep the wheels of economy going.

If there is any sector that deserves the stimulus most it is the export sector. For the 12th consecutive month in September our exports declined, though by a lesser margin of 13.8 percent. That is because this sector is entirely dependent upon foreign demand that has been seriously affected because of the recession the developed countries. There is however a silver lining and that is if the exports have fallen so having the imports. But that is only a poor consolation. An ideal situation will be to increase both imports and exports. It is therefore important to continue with the stimulus measures, at least on sectoral basis for the time being.

The problem is that these stimulus packages have a negative effect as well. Our fiscal deficit has shot up to 6.8 percen,t against the stipulated 2.5 percent. Together with the states it comes to 10.09 %. This, indeed, is a cause for worry. The inflation rate too has started to show an ascending trend. Though right now it is only 1.5 percent, the estimates are that it too will reach 6.5 % by the end of the current fiscal. If that happens, it will become a lethal combination and that will be the time to make a turnaround and return to the financial system we had before the meltdown began. The country right now has to choose between growth and financial discipline and for now the priority indeed is growth.

The fact is that we are today in a much better position compared to many advanced countries of the world. India continues to be the 2nd largest growing economy after China. India is on a firm growth track. Things would have been far more cheerful if we had a good monsoon this year. But that was not to be. The consequent effect will be a shortfall in the production of food grains and other agricultural commodities, the estimates for which vary between various agencies. And agriculture provides 20 percent to our GDP. However experts hope that a good Rabi crop will largely compensate for the damage done to the kharif crops.

It is in this backdrop that the Prime Minister spoke about the economic reforms which the government intends to take up. These include reforms in the pension and insurance sectors to ensure rapid and inclusive growth.

The conflict now is between growth drivers which need a continuation of stimulus measures and inflation concerns which call for an early exit. That is why a well thought out exit strategy is needed to deal with the issues of both sustained growth as well as financial discipline. If growth is the priority today, a tight monetary policy could become the priority at a later stage. Better start working now.

* The author is a freelance writer
* The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of SME Times.
 
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Getting ready for a tight monetary policy
Pankaj | Thu Nov 26 16:44:53 2009
Despite Agriculture having a major role in economy, govt. major policies & schemes are not in sync with this fact. Industries are favoured against agriculture as it has former has more money involved. Agricultural land continues to be ruthlessly converted or other purposes mainly industrial and residential; many neighbouring nations are offering much lucrative business opportunities including more liberal labour laws and hassle free environment, India is still basking in self-glory mainly because of domestic demand which might be shortlived and hence it is important that it utilizes this oppotunity to make itself competitive for times to come. Instead of doling out money in terms of various schemes mostly rural efficacies of which remain in doubt, Govt. should further increase expenditure on defence by aggressively developing indigenous defence weapons which will indirectly support economy in present good times. It may be now or never. Further, govt. should stop spoiling people's habbit and traditional character by allowing people to go away without repaying their loan. All this at whose cost - people who have genuinely contributed for development of nation ? What are we trying to promote ? Ain't there any other method for taking care of such situations ? Or it is a planned handiwork to shiffon off money while displaying populist work ? Why not support


 
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