Government pushes rate cuts, pegs growth at 7 percent (Lead)December 23rd, 2008 - 7:25 pm ICT by IANS
New Delhi, Dec 23 (IANS) The Indian government Tuesday nudged the central bank to reduce key interest rates in a bid to offset the impact of global slowdown on the country’s economy, while warning that growth could fall to seven percent this fiscal.”An aggressive monetary policy may be necessary if global economic depression continues to adversely affect manufacturing,” said the finance ministry’s mid-term review of the Indian economy tabled in parliament Tuesday.
“There is a considerable scope for monetary policy easing over the next six to twelve months to offset the global increase in demand for money that is being transmitted to India,” said the review tabled by Minister of State for Finance P.K. Bansal.
The review said the central bank had taken steps in the past to ensure adequate credit to industry at lower cost, including a cut in the repo rate, or the rate at which banks borrow from the central bank. But the reverse repo rate remained untouched.
“A cut in the reserve repo rate would likely reduce the amounts parked under reverse repo and help in moderating the call money market rate,” said the review, alluding to the fact that the cost of short-term funds remained high.
The review said the crisis of this magnitude in industrialised countries was impacting economies around the world and that India has also been affected, but added it was difficult to make a precise forecast on growth for the year.
“The expectation is that it would be in the range of 7-8 percent,” the review said, adding: “We have to be prepared, however, for growth to be around 7 percent in 2008-09 as a whole.”
The review said India’s gross domestic product (GDP) growth in real terms in the first half of the current fiscal year was 7.8 percent, which was a fairly robust performance.
“However, it is likely to be significantly slower in the second half as the impact of slower export growth and weaker domestic demand, including a possible dampening of private investment, begin to be felt.”
This mid-year review is the second quarterly review as required under the Fiscal Responsibility and Budget Management Act, 2003, and reports developments in the economy and central government’s finances during the first half of the fiscal.
The review said if appropriate policy actions were initiated, India had several strengths to mitigate the adverse effects of the global financial crisis and the recession in some rich countries, compared with other emerging economies.
It listed the reasons as under:
- A relatively high share of services in gross domestic product than many other emerging economies and developing countries
- Strong rural income and consumption due to five years of nearly 4 percent farm growth and rural job guarantee programme
- High domestic saving rate of 36 percent in 2007-08 that should push investment
- Ambitious programme of infrastructure investment in the 11th Plan that should offset slowdown in corporate investment
- Scope for easing the monetary policy measures after the tight money policy in the first half of the fiscal
- An increase of 100 basis points in the investment rate in the first half of the fiscal
“In the face of global slowdown and a moderation in private investment demand, accelerating the pending policy reforms is, perhaps, the answer to flagging business sentiments and brining the economy back to 8.5-9 percent growth path.”
Briefing reporters later, Chief Economic Advisor in the finance ministry Arvind Virmani said there was a substantial stimulus this year both from the government and the central bank to help India sustain high growth.
“But the latest financial crisis is a monetary shock,” he said, adding: “The decline in crude oil prices will create more fiscal space.”