Indian economy has been observing rapid growth for the past six or seven years. In the post four years, the country observed an unprecedented average growth rate of 8.6%, but not anymore. On March 27, 2009, Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, said that Indian economy would grow less than 7% missing the government growth target of 7.1% in fiscal year 2008-09. Mr. Ahluwalia was attending the national conference and annual session of the Confederation of Indian Industry (CII) at the Taj Palace Hotel in
The $1.2 trillion Indian economy, the third largest economy in
Indian government has not decreased its spending and introduced tax cuts which would increase the country’s fiscal deficit. According to Arvind Virmani, Economist, Finance Ministry, the higher spending will help
The latest assessment by the Indian government revealed that the year 2009 will be worse than 2008 due to the growing fiscal deficit. In the previous budget session, government estimated the fiscal deficit to be 2.5% of the GDP which was revised to 6% in the latest interim budget session that took place last month. According to Ahluwalia, the fiscal deficit would be more than 6%.
Economic stimulus is going to further increase the fiscal deficit, yet, the government must continue its stimulus measures. In September,
The new government that will come to power in May must spend 1% of the GDP as “extra stimulus” to maintain the current economic growth. The effect of the stimulus package declared by the government will be seen in the first quarter of the next fiscal year. The IMF urged all the countries of the world to spend at least 2% of their GDP on stimulus. Countries like
According to Mr. Ahluwalia, an existing gap between inflation rates based on the official wholesale price index and different retail price indices is depriving consumers of the benefits of lower inflation.
On the first day of the conference, Duvvuri Subbarao, Governor, The Reserve Bank of India, said that his bank is in touch with other private banks in the country and asked them to lower their interest rates. Since October 2008, RBI lowered its lending rate by 400 basis points. From the same month, RBI slashed the percentage of deposits banks are required to keep as cash and its borrowing rate by 2.5 percentage points to 3.50%.
On February 16, 2009, Pranab Mukherjee, acting finance minister, said that Indian government will have to borrow $71 billion in the next fiscal year. Current debt of the government is equivalent of 80% of the country’s GDP.
(This entry was originally published in March 2009 and is written on the context of that time.)