Govt Says Spending May Jump To Counter Global Crunch

16 February, 2009

India said government spending may have to jump later this year to shield the economy from a global slump and stem job losses, as the government tried to woo voters ahead of a general election.

Acting Finance Minister Pranab Mukherjee charted spending plans for the 2009/10 fiscal year from April to July, in an interim budget measure to take care of essential spending during and in the immediate aftermath of the election.

Mukherjee said the fiscal deficit had risen to 6 percent of gross domestic product in 2008/2009 from a planned 2.5 percent, a rise that could shake investors increasingly wary of emerging markets.

He predicted a deficit of 5.5 percent of GDP in 2009/10 but implied this could rise if further economic stimulus was needed.

“Planned expenditure for 2009/10 may have to be increased substantially at the time of the presentation of the regular budget if we are to give the economy the stimulus it needs,” Mukherjee told parliament.

The minister announced an extension of interest subsidies to debt-hit farmers, a sign the government was focusing on the rural sector and its voters before the vote.

The spending plans are effectively a political manifesto of the Congress party-led coalition government since nationwide elections in the world’s biggest democracy must be held by mid-May.

“Extraordinary economic circumstances, very extraordinary measures, now is the time for such measures,” Mukherjee said. 

Mukherjee said that the government needed to accelerate policy reforms, including in the financial sector, and that social security nets needed to be strengthened.

Faced with faltering growth, the government has already announced two stimulus packages, including extra spending of $4 billion, while for its part the central bank has cut its key lending rate by 350 basis points since October to 5.50 percent.

The government has also unveiled plans to borrow 460 billion rupees ($9.45 billion) by the end of the fiscal year in March to fund its stimulus measures and meet extra spending needs.

The BSE Sensex extended losses to 3 percent on Monday morning, with investors apparently disappointed the interim budget did not set out a further economic stimulus.

The government estimates that growth in Asia’s third-largest economy will slip this fiscal year to 7.1 percent from 9 percent or more in the past three years.

“In these difficult times, when most economies are struggling to stay afloat, a healthy 7.1 percent rate of GDP growth still makes India the second fastest growing economy in the world,” Mukherjee said.

Data has shown the global slowdown is hurting key sectors including exports, housing and manufacturing. Analysts say anything under six percent growth is perceived as a recession by many Indians, with investments curtailed and jobs losts.

The prime minister’s economic advisory council expects growth to hold around similar levels in 2009/10, although private economists see that as too optimistic.

In its five budgets since 2004, the Congress party-led coalition has raised spending on health, education and rural employment but analysts say the economy has suffered due to a lack of economic reforms.


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Govt Says Spending May Jump To Counter Global Crunch

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