Fiscal stimulus to stay, summer crop seen down

Tue, Nov 3 09:52 PM

Enlarge Photo Finance Minister Pranab Mukherjee speaks at a business meeting in Kolkata December 21, 2008. India...

India will maintain its fiscal stimulus due to uncertainty arising from a poor monsoon and the global outlook, finance minister Pranab Mukherjee said on Tuesday, as data showed the summer crop could post a bigger-than-expected fall.

But Mukherjee also said there were distinct signs of pick-up in Asia's third-largest economy, with banks told to boost lending as non-farm credit growth remained an area of concern.

"For the present I maintain that the fiscal stimulus will have to continue, to allow its impact to fully run through the economy," Mukherjee told the annual Economic Editors conference.

"It is, however, an imperative to come back to the path of fiscal prudence, as soon as the current economic circumstances permit us to do so."

India's economic growth slowed to 6.7 percent in the 2008/09 fiscal year through March after three straight years of at least 9 percent, and government officials have said growth in the current year is on track for roughly 6.5 percent.

Government data showed the summer-sown grain harvest could fall 18 percent from a year ago, after the worst monsoon in 37 years damaged sugar cane, rice and oilseeds.

Cane production in the world's largest consumer of sugar is set to fall nearly 9 percent, the government's first estimates of the summer-sown crop harvest showed.

Mukherjee said returning the economy to growth of 9 percent would take more than a year, adding that the poor monsoon and then floods in some parts of the country had obvious implications for agriculture and food prices.

FISCAL PRUDENCE AND REFORMS

The finance minister's comments came a week after the central bank laid the groundwork for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of asset price bubbles.

The Reserve Bank of India (RBI) left key interest rates on hold but surprised markets by removing emergency liquidity support measures implemented in 2008 to protect Asia's third-largest economy from the global downturn.

Policymakers including Prime Minister Manmohan Singh have pressed the case for keeping easy fiscal and monetary policies in place to nurture growth.

Mukherjee said he was confident of meeting medium-term fiscal targets, and expected higher tax receipts in the second half of the fiscal year ending March 2010.

The government plans to borrow a record 4.51 trillion rupees ($95 billion) this year to finance a fiscal deficit of 6.8 percent of GDP, which is the highest in 16 years.

"Serious concerns were voiced on the implications of the government's borrowing programme to fund the increased fiscal deficit in 2009/10 on the cost and the availability of funds for private placement," Mukherjee said.

"I had clarified that these concerns were misplaced. Notwithstanding the increased borrowings in the current year over the last fiscal year the cost of borrowings has been significantly lower so far."

The finance minister said the government had identified a few more state-run companies that it could sell stakes in, with the timing of any sale dependent on market conditions.

Mukherjee said it was imperative for the government to pursue reforms, including in the financial sector, to make the economy more competitive and the regulatory system more efficient and more sensitive to new developments.

(Additional reporting by Mayank Bhardwaj and Ratnajyoti Dutta; Writing by Surojit Gupta; Editing by Mike Peacock)

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