The government may consider sector-specific stimulus to revive the slowing growth of the Indian economy but will refrain from offering a generalised package as it aims to narrow the widening fiscal gap.
“Within the framework of containing fiscal deficit, it is possible to selectively provide some stimulus. But a generalised stimulus, like the one introduced in 2008-09, appears to be difficult because we have a high fiscal deficit,” C Rangarajan, chairman of economic advisory council to the Prime Minister, said in an event organised by the Indian Statistical Institute.
India’s fiscal deficit is expected to widen to 5.9 per cent of gross domestic product (GDP) in 2011-12 from 4.7 per cent in the previous year. “There is still a debate going on in some of the developed economies whether the fiscal stimulus programme should continue or not... But we have made up our mind that we need to contain our fiscal deficit and bring it down,” Rangarajan said.
The government has set a target of reducing the fiscal deficit to 5.1 per cent of GDP this financial year. He said the government needs to cut subsidies even if they appear “unpopular”. According to him, there is scope for reducing the subsidies on fuel and fertilisers.
“It is extremely important to ensure that fiscal deficit is contained at the budgeted level. For this, we need to act on subsidies. These actions can be unpopular but we will still have to take them. While some subsidies, like on food, are extremely important and cannot be dispensed with, there are other subsidies that can be controlled,” he said.
“In case of fuel subsidies, while we have allowed oil marketing companies to price petrol according to market conditions, we have not done that with relation to diesel, kerosene or LPG,” he added.
I can understand some sensitivity with respect to kerosene, but in case of both diesel and LPG, we should really move in the direction of increasing prices," he added.
He said there is an immediate need to build a political consensus in relation to good economic policy.
Rangarajan said the government will continue to take steps to improve capital flows to the Indian economy.
"We are taking actions that will improve investors' sentiments. The sentiments of investors, both domestic and foreign, need to go up in order to ensure that we have larger investments... It is as part of this scheme that clarifications (on General Anti-Avoidance Rule or GAAR) have been issued. I think further actions will be taken, which will improve the sentiments," he said.
Capital flows from foreign institutional investors (FIIs) to India have slowed in 2011-12 due to uncertain macro-economic environment globally and declining growth of the domestic economy.
FIIs’ net investments in India last financial year fell by 45 per cent to Rs 83,045 crore. So far this financial year, the net investments from FIIs in debt and equity markets have been only Rs 5,911 crore.
Rangarajan, however, remained confident that investment flows will pick-up in the coming months. "I believe the sentiments can be reversed partly by Indian economy showing a higher growth rate. If that happens, it will act as a stimulus for capital flows into the country," he said.
"I don't think India will have any difficulties in attracting capital flows in the order of $60-70 billion in a year through channels like FIIs, foreign direct investments, external commercial borrowings and non-resident deposits," he added.
He expects the GDP growth to be around seven per cent in 2012-13 and added that the government must focus on farm and infrastructure sectors to support economic expansion.