Fiscal, monetary measures likely

Written by Economy Bureau | New Delhi | Updated: Apr 4 2009, 07:14am hrs
G-20 promise
RBIs next round of rate cuts, and another fiscal stimulus, could come sooner than the calendar of the general elections may allow for. Thats the most likely fallout of the commitment made by India as well as other leaders in the G-20 communiqu issued in London on Thursday, which US President Barack Obama described as not a panacea, but a critical step to help world economies rebound.

The document clearly says expansionary government spending will continue: We are committed to deliver the scale of sustained fiscal effort necessary to restore growth. On the prospects for a rate cut, the G-20 says, Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.

RBI is slated to announce its monetary policy review on April 21. The central bank has already cut its short-term lending, or repo, rate by 400 basis points since October. The fall in inflation to 0.31% gives RBI greater room to cut key rates, although bankers expect it to maintain status quo in the near term.

Underscoring the role of countries like India, China and Brazil with that of the developed world to tackle the economic crisis, Obama said at his news conference on Thursday evening at the conclusion of the summit: We felt that it was very important to strengthen our international financial institutions because developing countries, emerging markets are threatenedeven though they may not have been the cause of this crisisthey are threatened by capital flight; theyre threatened by reduced trade finance, drops in consumer demand in developed countries that were their export markets.

However, Manmohan Singh said in London that India had no plans to approach the IMF for support. We do not visualise any need in the near future to go to the IMF, Singh said, adding that India would, instead, consider raising its contribution to the fund in proportion to the enhanced quota.

In its quarterly research on emerging economies issued on Friday, Barclays Capital projected the Indian GDP to grow by 4% in 2009-10. The IMF has estimated that world growth in real terms would resume and rise to over 2% by the end of 2010. ADB too expects a recovery in 2010. The Barclays report also expects RBI to let the rupee depreciate by another 10% to support growth. The rupee is currently at 50.30 to a dollar.

The Centre is also widely expected to enhance its borrowings going forward, though some experts and institutions argue India has no more fiscal headroom. ADB said in its 2009 outlook that India has no scope for another fiscal stimulus. But Planning Commission deputy chairman Montek Singh Ahluwalia said last week that the economy might need some more stimulus.

Following the G-20 pledge, India may also have to rewrite its company laws to ensure that pay for senior company executives relate to their performance. At present, companies only need to mention the salary of key executives in their annual reports, but dont ask shareholders to vote on them.