Words of Hope

The government in its mid-year economic review said we should be prepared for growth of about 7% in FY09, while it expects declining trend in inflation to continue. However, it feels that outlook on economy continues to be one of cautious optimism, and macro-economic fundamentals also continue to be strong. Meanwhile, on commodities front, Indian government sees that commodity prices will fall further on global slowdown and this fall will offset impact of falling exports. The government said FY09 additional fiscal stimulus is seen at 2% of GDP and we need to push pending reforms for 8.5-9% growth, adding that it sees higher non-tax revenue from spectrum allotment. “We may have to forego fiscal consolidation aim for FY09.” However, foreign direct investment or FDI inflows are seen strong despite growth slowdown." “There are signs of slowdown in growth across sectors and the financial crisis will moderate capital inflows and export growth,” it added. The government said fall in rupee is stronger in offshore non-deliverable forward or NDF market and huge short sale in rupee in offshore market is impacting the spot rate. “Money market situation continues to be fluid.” It feels that the final figures of fiscal, revenue deficit may top budget aim. Commenting on the banks, the centre said, the Reserve Bank of India or RBI will keep a track that tight liquidity doesn't hit credit availability. It said that cut in reverse repo may help increase liquidity; also there is a need to check parking of funds by banks in reverse repo. Also there has been no proposal to ban futures in more commodities. However, global financial crisis impact is seen higher than what the International Monetary Fund or IMF had estimated. But a positive ray of hopes comes in as job losses due to global financial crisis will be limited in India. Meanwhile, the statistics show that banks' exposure to five failed global financial companies stands at USD 1.08 billion as on September 30. Public sector unit or PSU oil retailers' FY09 interest burden is seen at Rs 8,100 crore, while the borrowing of the PSU oil retailers came in at Rs 1.15 lakh crore at November-end. On similar lines, C Rangarajan, Chairman, PM's Eco Advisory Council, said, “It is true that the Indian economy is not exposed directly to the toxic assets and the distressed assets of the developed world. Therefore the impact is not direct and the indirect effect is through trade and capital flows, which will lead to a slowdown.” Arvind Virmani, Chief Economic Advisor, said won't be suprised if growth falls to 7% in FY09 economy will see effect of stimulus measures in last qtrthis particular mid-year review. Meanwhile, Suresh Tendulkar, PM Panel Head, said, pressure on rupee is 'abated' and foreign exchange reserve position is comfortable, while FX capital outflows seem to have stabilised. He said, PM is closely monitoring micro, small and medium enterprises or MSME problems as high rates last year accentuated MSME problems. “However, current account gap may widen versus previous year and export-linked sectors are bound to be affected much more than expected,” he added. Tendulkar said “Inflation can fall to 4-6% by March-end and RBI can cut repo, reverse repo rates by 100 bps each.” He said a next fiscal stimulus package is based on feedback and the panel is assessing response of first fiscal stimulus package. Here is a verbatim transcript of Abhijit Neogyy’s comments on CNBC-TV18. Also watch the accompanying video. We had the Prime Minister and the Finance Minister in the recent past talking about scaling down the growth targets from a high of 9% to 7-7.5% - that was the kind of range. Today the government has informed Parliament in the official mid-year review of the Indian economy and the growth is likely to be at the bottom of that range around 7%. And that is completely understandable given the slowdown in exports; we have seen the dip happening in October and also the dismal Index of Industrial Production (IIP) figure, which is reflected in manufacturing growth all around. I think what is going to happen and we have seen first stimulus package accompanied by monetary policy, we are of course expecting a second stimulus package. What we do understand is that the impact of that stimulus package on the fiscal deficit would be 2%. If there was a base target of 3% of fiscal deficit, and 2% is added on that, which means that we are going to end up this year with about 5% fiscal deficit. But, then fiscal deficit is not an issue in the days of a slowdown, a package to prop up economy is something, which is going to be expected. The big question is that will monetary policy also accompany it. The economic survey or the mid-year review sort of indicates that aggressive monetary policy action will continue to be the RBI’s policy stance, in fact the mid-year review growth, so far is to say that the cost banks are parking a lot of their liquid cash with the RBI, there is a definite case for cut in the reverse repo right away. So, yes the macro economic fundamental, the savings and investment rates right now seem to be okay more than 35%. But if this state of the economy continues to be like this, even the savings rate and investment rates could actually come down. So, it is a state where infrastructure spending, as well as a stimulus package could prop up the economy. That is accent of emphasis of this particular mid-year review.