In the next six months, I dont think rates will go up, said Mr Chidambaram, citing ample credit to meet the demands of companies and sufficient funds to finance budget deficit in Asias fourth-largest economy. There is huge liquidity in the economy. In the medium term, I dont see rates going up unless something [unforeseen] happens, he said in an interview to Bloomberg.
Earlier this month, the finance minister had asked the Reserve Bank of India to maintain benign rates to fuel investment and growth in an economy that is now less than half of the size of neighbouring Chinas, Asias second biggest. India got $4.5 billion of foreign investment in the year ended March 31, 2004. China received $61 billion in 2004.
The economy has to expand more than 7% a year to cut the budget deficit, Mr Chidambaram said. The Fiscal Responsibility and Budget Management Act requires the government to cut its fiscal deficit by 0.3 percentage point of gross domestic product (GDP) a year until March 2009 and erase its revenue deficit, meaning it can only borrow for investment purposes thereafter.
The government expects to cut the fiscal deficit to 4.3% of GDP in the year starting April 1, 2005 from 4.5% of GDP this fiscal. The revenue deficit, the balance of recurring spending and revenue, will stay at 2.7% of GDP.
If the economy grows at over 7%, we have an easily manageable fiscal situation, Mr Chidambaram said. If we keep the economy growing at more than 7%, most of our problems are eminently manageable. A 1% increase in tax revenue will give us an additional Rs 34,000 crore, he added.