Ministries at odds over stimulus exit

Ministries at odds over stimulus exit
The Economic Times, January 7, 2010, Page 1

G Ganapathy Subramaniam, ET Now

Commerce and industry minister Anand Sharma has urged against an immediate rollback of last year’s stimulus measures, wading into a debate on the
timing of the stimulus exit that has pitted ministries, policymakers and industry on different sides.

The finance ministry, trying to manage the highest fiscal deficit in 16 years and galloping food price inflation, is keen to do away with the stimulus measures on the grounds that these have helped shepherd India’s economy safely out of the worst global economic crisis since the Great Depression.

Finance secretary Ashok Chawla, the senior-most bureaucrat in the finance ministry, on Wednesday said continuing stimulus measures wasn’t good for the economy, arguing that “too much of stimulus can be injurious to health” and clearly hinting that a rollback of the stimulus measures may be on the cards. However, Mr Sharma urged caution. “We have to be cautious in withdrawing the stimulus measures. The recovery is stimulus-led and stimulus-fed. Without stimulus measures, the recession could have turned into a depression,” he told ET NOW in an interview.

The stimulus measures — a mixture of tax cuts, increased expenditure, easy credit and interest rate cuts all totalling more than 12% of GDP — were announced in three phases between September 2008 and April 2009. Around this period, economic growth slowed to nearly 6% levels after averaging more than 9% in the preceding three years. The economy has since recovered, notching 7.9% in the quarter to end-September.

The commerce minister said the improvement in leading economic indicators in the run-up to the Budget next month-end “should not lead to measures that will hurt in the long run”, pitching his views closer to that of industry that wants the stimulus measures to be kept in place for at least another six months. “Even if we have done well, we cannot afford to turn complacent,” he said.

Easy availability of credit and lower interest rates should stay, Mr Sharma emphasised, adding that Indian industry was always at a disadvantage due to higher cost of capital, and the improved liquidity in the wake of slowdown had only partially neutralised the handicap.

He, however, acknowledged that keeping fiscal deficit under control was a major challenge, and said he trusted finance minister Pranab Mukherjee to come up with fitting measures. “I know the FM has his concerns. His work is difficult.”

Mr Sharma said India needed to move onto a higher growth trajectory to lift millions of people out of poverty, and said for this to happen the country had to become a strong manufacturing hub like China. The government was planning to set up dedicated investment and manufacturing zones, much like special economic zones (SEZs), and arm them with incentive packages to boost the share of manufacturing in the country’s GDP to 25% from around 16% now, Mr Sharma said.

While SEZs will play a key role in boosting exports, the manufacturing zones will seek to shape India into a strong manufacturing hub like China. Appointed commerce minister in the UPA government’s second stint, Mr Sharma has presided over a recovery in India’s export performance. Exports rose 18.2% in November, the first rise after 13 months of decline.

Mr Sharma said while exports were on the recovery path, a ‘full and sustained’ recovery would happen only when demand picks up across the US, Europe and Japan.