Stimulus measures must continue, recovery will take time: Montek

Stimulus measures must continue, recovery will take time: Montek
The Financial Express, April 8, 2009, Page 2

Anticipating a sharp slowdown in the private investment, Planning Commission deputy chairman Montek Singh Ahluwalia on Tuesday endorsed continuing the stimulus programme in this fiscal at least equal to the level of 2008-09. Ahluwalia said the fiscal deficit in 2008-09 could be at the level of 6.8% of GDP. “I don’t recommend it to lower in the next year,” he said at Shankar Acharya’s book launch.

Ahluwalia said private investment will tumble due to shrink in the demand and difficulty in financing investment, while ruling out inflation being a problem in this fiscal. “There is not even a dog’s chance of inflation this year,” he said. He was responding to the concern that the high level of fiscal stimulus could stoke inflation going forward.

Ahluwalia said while the virtue of fiscal prudence cannot be denied, the global crisis and consequent slowdown require demand stimulation this year, especially since the export demand is unlikely to recover. “Public expenditure is a bit like opium, once you get into it, you can’t get out of it,” he said.

Arguing for expanding the perimeter of regulatory framework, the deputy chairman stressed on the need to make a clear distinction between relying on the real economy and relying on the financial economy. Due to the presence of information asymmetry, the financial economy by its nature needed greater regulation, he said, adding that there was clear consensus on this view among G-20 countries. Ahluwalia also argued that the Indian and global recovery is not going to be V-shaped, implying that the recovery will not be swift and rapid, rather it will be attenuated and flat.

Former chief economic advisor to the finance ministry Shankar Acharya during the launch of his book ‘India and Global Crisis’ said, ‘India’s recovery will be slow due to weak global economy, high fiscal deficit which is likely to persist in 2009-10 and the likely election of a coalition government that would shy away from taking strong decisions.’ He projected the GDP to grow between 4% and 6% in 2009-10. Indian Council for Research in International Economic Relations director and chief executive Rajiv Kumar said crisis demanded innovative solutions. He suggested the RBI should reduce the reverse repo rate to zero from 3.5% at present to discourage banks from parking excess short term funds with the RBI.

The RBI may even impose a charge on banks parking funds at the reverse repo, he said. He also argued for ‘some sort of government diktat’ or incentive for private banks to start lending credit.

“The private banks have been performing worse than the public sector (in lending),” he said.