By Cherian Thomas and Kartik Goyal
Nov. 9 (Bloomberg) -- India may be among the first Group of 20 nations to begin winding back fiscal stimulus after Prime Minister Manmohan Singh said faster economic growth would allow the measures to be withdrawn.
“There are clear signs of an upturn in the economy,” Singh told the India Economic Summit organized by the World Economic Forum in New Delhi yesterday. “Like other countries we resorted to a significant stimulus and we will take appropriate action next year to wind this down.”
Singh’s comments are at odds with policy makers from the U.S., Japan, Australia and other G-20 nations who said at the weekend it’s too early to withdraw fiscal steps designed to support global recovery. India’s central bank last month began to tighten monetary policy amid concerns that an inflation flare-up may hit the pockets of close to 800 million Indians who live on less than $2 a day.
“Demand in India has picked up and a continuation of stimulus may not be necessary next year,” said Arun Duggal, chairman of Shriram Transport Finance Co. Ltd., the nation’s biggest financier of trucks and buses. “Stimulus should remain in developed countries as their economies are in a more fragile state and could tip backward.”
Singh said India’s economy may grow 6.5 percent in the year ending March 31, constrained by weak monsoon rains that hurt crop production. With better rainfall in the four-month season starting June 2010, the economy may expand over 7 percent in the year commencing April 1, he said.
Wal-Mart
India’s economic strides prompted Wal-Mart Stores Inc., the world’s largest retailer that has a wholesaling venture with the local Bharti Group, to open as many as 40 more “cash & carry” stores in the country. Wal-Mart opened its first Indian wholesale store on May 30, with initial plans to start 10 or 15 more outlets during the next three years.
Tata Steel Ltd., India’s biggest producer of the alloy, reported October sales rose 38 percent, while sales at Bajaj Auto Ltd., the nation’s second-largest motorcycle maker, gained 46 percent during the month.
India began to tighten monetary policy as the central bank forecasts inflation to accelerate to 6.5 percent by March 31 from 1.51 percent. Asset prices have been climbing as well, evidenced by the 68 percent rise in the key Sensitive index on the Bombay Stock Exchange.
‘Calibrated Way’
The Reserve Bank of India on Oct. 27 ordered lenders to keep more cash in government bonds, raising the statutory liquidity ratio to 25 percent from 24 percent. Governor Duvvuri Subbarao said it was appropriate for the central bank to exit monetary stimulus in a “calibrated way.”
The rupee advanced 0.6 percent to 46.55 per dollar as of 9:40 a.m. in Mumbai, rising for a fourth day, on speculation an improving economy will attract more foreign investment. The Sensex gained 0.7 percent, to 16,268.23 at 9:56 a.m.
Raghuram Rajan, former chief economist at the International Monetary Fund and now a professor at the University of Chicago, said it was “quite appropriate” for the Indian government to think about winding down fiscal stimulus.
“I am not saying do it today, but do it over the next year and going forward,” Rajan said in New Delhi yesterday.
India’s central bank needs to consider an exit from monetary stimulus as interest-rate policy needs to be conducted with “foresight,” Rajan said. “By the time inflation starts picking up, by the time capacity constraints start showing, its too late to do it with monetary policy.”
Asset Bubbles
China also risks faster inflation and asset bubbles as Asia’s second-biggest economy pursues “excessive growth,” Yao Jingyuan, the statistics bureau’s chief economist, said at a forum in Beijing last week.
The Chinese economy is assured of expanding 8 percent in 2009, meeting the government’s target, according to Yao.
India may consider rolling back fiscal stimulus early in the year starting April 1, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said in New Delhi yesterday. This would help reduce a budget deficit estimated to reach a 16- year high of 6.8 percent of gross domestic product this year.
The Indian government has reduced taxes on consumer products and imports and increased spending, aiming to shield the $1.2 billion economy from the world global recession since the 1930s.
Global Recovery
“The worst is behind us though the path of global recovery will be long and uncertain,” Prime Minister Singh said yesterday. “India has been able to face the global economic downturn better than most other countries in the world.”
The world economy may shrink 1.1 percent in 2009, according to IMF estimates. IMF Managing Director Dominique Strauss-Kahn warned Oct. 23 of the risk of a double-dip recession if countries implement exit strategies too soon.
U.S. Treasury Secretary Timothy Geithner told reporters after a meeting of G20 finance ministers in Scotland on Nov. 7 that “it’s too early” to “lean against the recovery.”
Japanese Finance Minister Yoshihiko Noda said it’s too soon to start unwinding measures, saying the recovery in his country “still lacks sustainability.” Australian Treasurer Wayne Swan said yesterday government stimulus shouldn’t yet be retracted as winding up the program would threaten jobs and economic recovery.
“The developed countries seem to be very cohesive in thinking that stimulus should continue,” Rana Kapoor, chief executive officer at Mumbai-based Yes Bank Ltd. said in an interview with Bloomberg News yesterday. “Every nation needs to watch out for country-specific conditions and take actions best suited for them, and that’s what India is doing.”
Countries should withdraw stimulus too late rather than too early as the global recovery is likely to be “sluggish,” the IMF said in a report prepared for this weekend’s meeting of G20 officials in St. Andrews, Scotland.
India’s next budget is due to be released in late February 2010 by Finance Minister Pranab Mukherjee, who attended the weekend meeting of G20 officials.
“World demand will pick up only slowly,” Singh said yesterday. “Our strategy therefore must aim at sustaining a high rate of growth on the strength of strong domestic demand.”
To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.netCherian Thomas in New Delhi at cthomas1@bloomberg.net
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