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India has little room for China-style stimulus

Posted by Yogesh on Monday, 10 November, 2008

NEW DELHI (Reuters) – India has little scope for a big bang fiscal stimulus package like China’s $586 billion plan and will hope instead populist spending plans outlined earlier this year can help it ride out the global financial storm.

India’s federal and state fiscal deficit is likely to top 7 percent of gross domestic product, one of the highest in the world, and the federal deficit is already projected to blow its 2.5 percent target, leaving the emerging giant with little leeway to ramp up spending, analysts said.

What limits India’s fiscal firepower is off-budget liabilities, such as the government bonds issued to refineries to keep down retail oil prices, which economists say feed into the broader deficit and total about 5 percent of GDP.

“With the fiscal deficit all set to expand beyond the budgeted target for 2008/09 there is hardly any room for further fiscal stimulus to pump prime the economy,” said D.K. Joshi, principal economist at ratings agency Crisil.

India has been striving to achieve the sort of double-digit growth that has made China the world’s fastest-growing major economy, drawing inevitable comparisons on the performance of the two as they exert increasing influence in world trade.

While India lacks fiscal ammunition, China approved a new government spending package on Sunday equivalent to about 15 percent of its GDP to ride out the financial crisis.

One of the few nations that can still afford fiscal pump-priming, China’s move comes amid mounting evidence that the United States, Japan, the euro area and other developed nations are in recession, putting greater onus on Asia’s emerging giants to be a source of growth.

Policy makers globally are looking at fiscal stimulus as the next step to help their economies through the crisis following a barrage of bank bailouts to keep the financial system afloat and more lately cuts in interest rates.

ALREADY SPENDING

After growing into a $1 trillion economy, India is feeling the effect of the global turmoil in its lending and property markets.

Industries, particularly car makers, are being pinched by a slowdown in demand, which was already underway because of a rise in interest rates earlier this year to calm inflationary pressures.

Policy makers are ratcheting down their expectations for growth and now say it is likely to slow to 7 percent in the fiscal year to March 2009 from 9 percent in the previous year. China’s economy grew 11.9 percent last year.

The official target for India’s federal government fiscal deficit in 2008/09 stands at 2.5 percent of GDP and the finance minister has already said the government will overshoot that goal due to spending to tide over the impact of the financial crisis.

Spending outlined in the February budget went up more than 6 percent to 7.51 trillion rupees ($158 billion) in a package criticized by many as populist ahead of national elections in 2009.

The government asked parliament for an additional $21.7 billion last month to fund a scheme to waive farm debts and subsidies on food and fertilizers.

Analysts said at the time the sum was above their expectations and would result in higher borrowing, putting pressure on government finances and the fiscal deficit.

For now, India is relying on these projects, which also include a national job guarantee plan and an urban renewal mission, to keep the economy ticking over.

“It is not a need at the moment. Just because China has done it does not mean we will have to do it,” said Suresh Tendulkar, Chairman of the Prime Minister’s Economic Advisory Council.

“We will look at it if we need and it is going to be a tightrope between the fiscal situation and the need for doing whatever is required to be done,” he told Reuters.

HINDSIGHT

Prime Minister Manmohan Singh, who as finance minister in the early 1990s set in motion economic liberalization, said recently spending on education, health and other programmes would stand India in good stead in difficult times.

“Our expenditure proposals were criticized at the time in some quarters, but I am happy to note that it is now widely acknowledged that increased public expenditure is an important part of the solution,” Singh told lawmakers.

But economists say India has a poor track record in ensuring projects get implemented, undermining their effectiveness as a source of economic stimulation, and nearly 35 percent of its spending still goes on subsidies and interest payments.

Corruption and bureaucracy are also obstacles to funds reaching their goal and projects starting or finishing on time, although the government has streamlined some of its approvals.

“Our capacity to spend and do quality work is limited,” said Saumitra Chaudhuri, economic adviser at ratings agency ICRA.

“We are quite good at wasting money such as subsidies for petroleum products and fertilizers. So any blanket call for further public expenditure is very misdirected.” Source Reuters

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