To get inflation under control, we cant maintain a wide open monetary stance

Written by Surabhi Rastogi | Surabhi | Rituparna Bhuyan | Updated: Oct 16 2009, 04:04am hrs
Its been over a month since the new Plan Panel held its first meeting to review the state of the economy.

Saumitra Chaudhuri, member of the Planning Commission and the Prime Ministers Economic Advisory Council, spoke to FEs Surabhi and Rituparna Bhuyanon how he expects the economic situation to pan out.

On stimulus:
People like to invest in stable climates. For that, price stability is the central issue. If you get price stability, plenty of other things will fall in place. So we need to get inflation under control. To get inflation under control when economic growth seems to be reviving, we cant maintain a wide-open monetary or fiscal stance. The monetary stance is not a matter of government policy, its the RBIs stance and the governor is already hinting at lighting up the exit lights.

On the fiscal side, the wide-open stance was there because of certain specific reasons. Because there was a crisis, we needed to provide support to the economy, which was flailing because of what happened in the rest of the world. So there were concessions on taxes, and we had huge expenditure last year because of the oil subsidy, the fertiliser subsidy and the civil servants pay revision. So this year the deficit is very large, but this is not something we can sustain.

And not only do we have to get out of this fiscal stimulus and get on to fiscal stabilisation, but people must realise that we are starting all this today. Many of these things like the deficit is pre-determined by the fact that the Budget is already presented, so by and large whats going to happen in 2009-10 is a given. But people must realise that next year is going to be different. The government has to make it very clear that the easy money is over and we have to start conserving financial resources. We have to contain the deficit and we have to begin today.

On Deficit:
By and large the deficit will be what it is because you cant change it. But I would like you to notice and what is even more important is that we had a Rs 4 lakh-crore fiscal deficit this year and we financed it. We had a large deficit of about the same number last year. We financed that. But we cant do this forever. Besides, if we did this forever people would have no value or faith in the rupee, how would it be financed

Remember one more thing -- we had built a position on the market stabilisation scheme of Rs 1,78,000 crore as on August 2008. This became available to the government last year and this year, in these extraordinary circumstances.

But we cant finance this kind of deficit; we have to curtail it, which means that we have to readjust the plan size for next year. Its not always possible to find resources to finance the plan as it was originally envisaged unless there is enormous tax revenue buoyancy next year or we curtail our subsidies and find space. Its possible, but lets see if we do it.

The third is that there are more disinvestment programmes and there are more funds to finance infrastructure programmes and so on. Well see what happens on that.

So yes, to some extent they can be offset, but it is unlikely that theseeither subsidy reduction or the disinvestment programmecould be adequate in order to actually make up for the gap. So theres going to be some gap, it doesnt matter.

On Exports:
I personally believe that well register positive growth in exports in the second quarter but that will be just bring us back to status quo anti. It wouldnt get us additional growth. By status quo anti, I mean that last year exports collapsed in the second half of the year and well get back to where we were. We wont get out of it.

In 2010, I think the developed countriestheyre all recovering to growthwill have very low level of growth. It will be positive growth but itll take them a while to actually step up for two reasons. First, theres a huge overhang of debtboth public and private and this isnt good. In the household sector, what households have been doing is saving more - by consuming less.

Thus, what is going to happen is overall demand for exports will be sluggish for some timemay be another year or another year and a half or it may be two years. So, if they remain sluggish, all the exporting countries (will try to) get a share of that market, and so they will have to be competitive. So exports growth will be difficult.

If I may say so, service exports may bounce back much more as most of it is not linked to personal consumption. It is linked to business expenditure so it will probably bounce back as businesses start growing. They have started growing already, so may be by next year they will be growing well, so we are confident that by March 2011, they will be in full growth.

On Growth:
Right now we are assuming that we will have some reduction in farm sector growth, about 2-2.5%, and overall economic growth will be some what about 6.2% to 6.3%. But lot of things are still not known. We know that there will be some recovery in the second half, in the industrial sector, it could be stronger than what we are expecting. So, the over growth could be 6.2%, 6.3% or 6.4%. It may not be 7%. First quarter we grew 6%, second quarter growth may be probably the same, third quarter non-farm sector will do quite well but farm sector will be dragging it, the fourth quarter, probably both farm and non farm sector will be fine and we will see a strong growth.