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| Govt hints at gradual fiscal consolidation |
| BS Reporter / New Delhi Dec 19, 2009, 01:05 IST |
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Survey expresses serious concern at food prices, farm growth.
 The government today clearly hinted at a planned and gradual exit strategy for its stimulus package once the economy is poised to sustain the recovery without it.
In its mid-year review of the economy for 2009-10, the government also projected that the growth in gross domestic product (GDP) could surpass 7.75 per cent in 2009-10. Finance minister Pranab Mukherjee had earlier projected a 7 per cent growth rate this year.
On the stimulus exit, it said the timing and pace would rely on the “strength of the recovery and its sustainability without fiscal stimulus”. The purpose being to pull down the fiscal deficit to 5.5 per cent of GDP in 2010-11 and then to 4 per cent in 2011-12, from the current year's estimated figure of 6.8 per cent. This, the government believes, would be possible with the introduction of the proposed goods and services tax (GST) and the new direct taxes code, which is expected to give the economy the required impetus to be able to maintain growth without any bailout.
The review, tabled by Mukherjee in Parliament, noted that limiting the increase in expenditure and a complete reform of the varied subsidy regime would provide a more sustainable base for fiscal consolidation. It also recommended proper monitoring of major components of growth in the next two quarters.
It also expressed serious concern over the rising wholesale prices of essential food items, the fastest in the past 11 years. This might induce the Reserve Bank of India (RBI) to raise borrowing rates.
The mid-year review also highlighted the deceleration in agricultural growth. “There is a need to augment farm income, so that the sector could have a more meaningful contribution in the economy,” it stated, while underscoring the need to rein in rising prices of food items.
It also highlighted the need to improve infrastructure and communications systems, particularly in rural areas. Lack of growth in agriculture is also responsible, due to the inability of farmers to directly access markets and their dependence on middlemen.
The review has also asked for regulation of capital inflows, which has led to soaring inflation and appreciation of the rupee against the dollar. “This is, however, a matter that will need some deep strategic thinking in the long run.”
Growth in credit offtake continues to be an area of serious concern. While the overall demand remained low, it said corporate entities had been able to access non-bank domestic sources of funds and external financing at lower costs.
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