Govt sees more room for rate cuts

Setting stage for the much-awaited next round of stimulus package, the Government said that the country could do with more rate cuts and other fiscal measures to boost economic growth amid fears of a prolonged global recession. "Having run tight monetary policy during H1 FY09, there is considerable scope for monetary policy easing over the next 6-12 months to offset the global increase in demand for money that is being transmitted to India," the Finance Ministry said in its Mid-term Review of the economy. "An aggressive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing," the ministry said in the report that was tabled in parliament.

The country also needs to increase spending on infrastructure to offset declining private investment, the Finance Ministry said in its assessment of the economy for the first six months of the current financial year. Indian companies should prepare for economic growth of 7% in the year ending March 31, down from 9% or more in the previous three years, the Mid-Term Review said today, giving a range of 7-8% for growth for FY09. "The economic expansion in the current fiscal year is likely to be significantly lower in the second half as the impact of slower export growth and weaker domestic demand, including a possible dampening of private investment, begin to be felt," the Finance Ministry said.

On the positive side, the review expects the inflation to cool down to normal levels' by the end of the current fiscal. "The decline in the inflation rate is expected to continue for the rest of the current fiscal year," Arvind Virmani, the finance ministry’s top economist, told reporters in New Delhi today. Inflation may slow to 5% by March end, he said. He also said that the stimulus package that the Government has announced and other off-budget spending plans, including higher salaries for government workers, oil subsidies and farm-loan waivers, are likely to widen the fiscal deficit to at least 5% of GDP.

Speaking in Mumbai, the chief of prime minister's Economic Advisory Council, Suresh Tendulkar, said that it was up to the RBI to take a call on whether and when to reduce rates, which were last cut on Dec. 6. "It is desirable to reduce the repo and the reverse repo rate, I think, by 100 basis points in my judgement," Tendulkar said. The central bank has lowered the benchmark repurchase rate by 2.5% to 6.5% in three cuts from Oct. 20 to Dec. 6.