Montek says govt may call for more stimuli, rate cuts

India may have to resort to further stimulus measures despite a widening fiscal deficit along with further cuts in interest rates to avert a sharp economic slowdown, Planning Commission deputy chairman Montek Singh Ahluwalia said today.
Speaking at the annual summit of the Confederation of Indian Industry (CII), Ahluwalia said the Indian economy is likely grow only 6.5 per cent in the current financial year, which will end in a few days, missing the government's target forecast of 7.1 per cent growth. On a calendar year basis, 2009 is going to be significantly worse than 2008, he added.
Speaking at the same session, Arvind Virmani, chief economic adviser to the finance minister, too, said that given the severity of the global downturn, more steps may be necessary. "If we have a crisis of this dimension, there is a huge impact on demand. So both fiscal and monetary policy will have to be brought into operation," Virmani said.
"It will require a very definite use of fiscal and monetary policy," Ahluwalia concurred. "I think, while the rest of the world will do worse in 2009, the next government will be trying to see whether we can do as well next year as we did this year," Ahluwalia said. Fiscal deficit, however, may climb to as much as 7 per cent of GDP in the coming financial year, up from a previous forecast of 5.5 per cent, Virmani added.
With a slowdown in demand, India is also likely to see negative inflation in the coming year. Virmani said, in the coming financial year, inflation is likely to be in the range of negative 2 per cent to 2 per cent. "If one looks over a year ... March-end to next year ... I would expect a zero, plus-minus 2 per cent, inflation," he said.
However, ruling out any possibility of sustained deflation in the economy, he added that the consumer price deflator used for GDP is more indicative of inflation and that is not expected to be anywhere near zero. "We don't have the aggregate CPI (consumer price index). We pay attention to the WPI (wholesale price index). Globally, they look at the CPI. To conclude on the basis of WPI is not good," he said. He added that consumer price inflation, in which food items have a greater weight, is still in double digits and would come down the same way as WPI, but with a lagged effect.