What was the size of India?s stimulus package after September 2008? It is impossible to give a clear answer. IMF documents mention a fiscal stimulus of 0.5% (or 0.6%) of GDP for calendar years 2008 and 2009, after stating that ?headline? fiscal numbers are higher. PM and FM have talked about 3.5% or even 4% of GDP. The difference is due to definitions of the fiscal package. Do we only include what happened after September 2008 or do we include public expenditure through flagship programmes, National Rural Employment Guarantee Scheme (NREGS), farmers? debt relief and 6th Pay Commission for government employees, all of which pre-dated September 2008? The three fiscal packages introduced between December 2008 and February 2009 are insignificant in comparison. There are no firm figures on the size of fiscal multiplier in India, though it should be lower than that in developed countries. The point is that 6.7% growth in 2008-09 looked respectable because of 7.8% and 7.7% in Q1 and Q2. Q1 of 2009-10 shows 6.1%. That?s the kind of trend we are on in 2009-10, around 6%. Despite so-called green shoots, there is no evidence of private consumption or investment expenditure having recovered. And till August 2009, the last month for which we have data, exports show no sign of revival. Growth prospects remain low, not significantly above the 5.8% in Q3 and Q4 of last year.

The direct impact of the fiscal stimulus has tapered off, as RBI also states. And though drought is no longer as serious as was once feared, it will have some impact. Consequently, it is premature to exit from stimulus packages. Fair enough, but stimulus doesn?t mean only fiscal policy, there is monetary policy too. A good reason for tightening monetary policy would have been inflation, which RBI now thinks will be 6.5% in end-March 2010, not 5% as was originally expected, and higher than target of 4 to 4.5%. RBI has mentioned increases in prices of assets like stocks, real estate and commodities. However, inflation has been driven by food price increases, whether one uses WPI or CPI, with food weights higher under CPI than WPI. In its October report, PM?s Economic Advisory Council (EAC) concluded: ?Inflationary pressures on the food front will continue to be a major problem for policy formulation for the rest of 2009/10 and up to the beginning of the next monsoon season, which will hopefully be a normal one. The supply response will have to be a more co-ordinated release of stocks through the public distribution system combined with some open market sales of public stocks if the need is felt. Precautionary arrangements for importing some rice to replenish public stocks must be considered. Considerable attention needs to be paid to the rabi season to try and ensure a strong harvest which will be the surest antidote to food price pressures.?

Fair enough. So one shouldn?t make the mistake one committed in 2007-08, by using monetary policy to address what is a different kind of problem, be it increases in global prices or increases in food prices. We don?t know whether RBI will continue to agree in January 2010, since it seems to be concerned about increased credit flows to real estate and NBFCs. But for the moment, in the growth inflation trade-off, it has erred on the side of growth, with key rates (repo, reverse repo, Bank Rate, CRR) left unchanged, though the provisioning requirement for real estate has been increased to 1%. This leaves the increase in SLR to 25%. What purpose does the SLR requirement serve, and are changes in it more than notional, since actual holdings are often more than minimum statutory requirements? The figure was 27.8% in March 2008. Here is the EAC again, explaining low credit off-take. ?First, banks were cautious in making additional or new advances in a situation where leading global banks were teetering on the edge. Second, depressed economic conditions, big losses due to lower inventory valuations and foreign exchange derivative contracts made companies cautious. Third, many companies having raised substantial leverage prior to the crisis, were cautious about taking on additional loan liabilities in an atmosphere where the direction of change was as yet unclear. Fourth, retail demand for loans was down because home-builders and buyers of automobiles were uncertain about the economic outlook, in particular about how much more real estate prices would correct and how much interest rates would decline.?

True, but the more important problem is mentioned elsewhere. ?Banks have added to their holding of government securities, both in the second half of 2008/09 and in the current fiscal as well. In the second half of last year banks added Rs 1,73,000 crore of government securities and another Rs 1,84,000 crore in the current year (to date). This may be construed as a risk minimising response. But the counterpoint is the large supply of government securities during this period as a result of the much larger-than-expected fiscal deficit?both on account of the designed fiscal stimulus and as a consequence of higher civil service pay and oil and fertiliser subsidies.? While we debate delinking of monetary policy from fiscal policy, we may as well scrap the SLR requirement.

?The author is a noted economist