More fiscal stimulus needed, say economists

Leading economists today called for more fiscal measures to sustain the Indian growth story.

At a conference organised by the Indian Merchants Chamber here, Standard & Poor’s Asia Pacific Chief Economist Subir Gokarn said banks were playing safe by parking money in government securities instead of lending to industry.

This meant that the slew of rate cuts by the Reserve Bank of India did not have the desired effect. The solution, Gokarn said, was to pursue big-bang reforms like privatisation and rationalisation of subsidies once the news government came to power.

“There is enough fiscal room still available with the government,” he said. JP Morgan Chief Economist Jehangir Aziz said banks should not be treated as the only source of funding in a downturn and companies should be encouraged for alternate sources of funding.

“When the economy was growing at 8-9 per cent, the real interest rate was 2 per cent, which implies that the growth and real interest rate differential was 6 per cent. Even after the series of interest rate cuts, the growth to real interest rate differential is 2 per cent. This shows that monetary policy alone cannot put the economy back on the high growth trajectory,” Aziz said, adding that the government should allow alternate funding options for companies through reforms in the corporate bond markets.

Saumitra Chaudhuri, member, Prime Minister’s Economic Advisory Council (EAC) said that future measures should be sector-specific. The cost of borrowing for the private sector remained a major concern, he added. Chaudhuri maintained that Indian economy would grow by around 7 per cent during 2009-10.