India may ease monetary policy

[Naveed Yaseen]

NEW DELHI: India’s growth is seen slowing to 6.5 percent in the fiscal year that ends on March 31, below official forecast of around seven percent, and there is room for more monetary easing, a senior government official said.

“One of the advantages going into next year is that we have a lot of room in the area of monetary policy,” Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters on the sidelines of a business function on Tuesday.

“That is an area where we still have room,” adding that many other countries don’t have that headroom as they have lowered their interest rates to near zero.

Since last October, India’s central bank has cut its main short-term lending rate by 400 basis points to stimulate flagging growth. Still, after the latest half percentage point reduction this month, the repo rate stands at five percent leaving scope for cuts.

Ahluwalia said his growth estimate was arrived at after simulating the effect of the global recession, drop in investment, falling exports and lower oil prices, and reflects a sharp fall from nine percent or more rise in the past three years.

“The net result of that is that growth will be somewhere around 6.5 percent or something this year,” he said.

Economic expansion in Asia’s third-biggest economy is seen dropping below 6 percent to a seven-year low in 2009/10, a Reuters poll showed last week.

The global economy is expected to shrink as much as 1 percent this year — its first contraction since World War II — below a January projection of around 0.5 percent growth, the International Monetary Fund said last week.

“In the rest of the world it is very clear 2009 will be worse than 2008 and those are calendar years. Our objective is for the fiscal year 2009/10, we should try to do at least as well as we did in 2008/09,” he said. Ahluwalia said there may be a need for another fiscal stimulus package.

India’s fiscal deficit is expected to be around 10 percent of GDP, one of the highest in the world and analysts expect it to rise more as tax revenues fall due to the economic slowdown.

“I would still argue that in spite of the high fiscal deficit there is a case for an additional fiscal stimulus in the present circumstances for the next year,” he said. reuters

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