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Fiscal deficit can't be sustained for long: Pranab
December, 31st 2009

Stating that the Indian economy cannot sustain a high fiscal deficit for very long, the Finance Minister, Mr Pranab Mukherjee, said on Wednesday that it is, however, still too early to pull out of the fiscal stimulus.

We shall have to strike a balance between the requirement of the economy and also the capacity of the economy to bear this level of fiscal deficit and borrowing, the Finance Minister said on the sidelines of a Corporation Bank event.

In December 2008 and later in February this year, the Government had cut its key duty rates, such as excise duty and service tax, in order to propel domestic demand and mitigate the adverse effect of the global slowdown on domestic industry.

The excise duty was cut to 8 per cent from 14 per cent, while service tax was reduced to 10 per cent from 12 per cent. Burdened by a growing fiscal deficit due to extensive borrowing to meet the budgetary requirements, the Government has since been looking to exit the stimulus policy and bring its revenues closer to the earlier levels by maintaining fiscal discipline.

Cautioning that any hasty move in either direction could lead to bigger problems, Mr Mukherjee said, Immediately coming out of (a) stimulus package, [an] exit policy might not be the best approach. There may be an adverse impact. The economy has suffered.

We ended 2008-09 at a GDP growth rate of 6.7 per cent, but the price we had to pay was a high fiscal deficit at 6.8 per cent of GDP. I have said earlier that this was not sustainable fiscal prudence is necessary, borrowing cannot go on indefinitely.

Mr Mukherjee had earlier said that the GDP growth rate for the current fiscal could touch 7.75 per cent, moving onto a 9 per cent after two years. In 2008-09, the economy grew 6.7 per cent.

He further added that the Ministry is also working with the Reserve Bank of India (RBI) to ensure that the credit needs of private players are not elbowed out with the huge borrowing programme in the current fiscal. Credit availability is important, surely it has to be improved, he said.

No hike in interest rates

Speaking on the sidelines of the event, the Bank Chairman and Managing Director, Mr J. M. Garg, said that even if the repo rate or the cash reserve ratio (CRR) is raised, banks may not actually increase interest rates as they have to meet their credit off take targets.

Key policy rates should have small quantum changes. RBI may marginally increase the CRR in January. However, in the next three months interest rates may not pick up because there is enough liquidity in the system. Even if repo rates are changed, interest rates may not pick up, he said.

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