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Can see room for aggressive use of monetary, fiscal policies: PM

PM Manmohan Singh said “inflation is now becoming less of a problem”, giving the government and the RBI room for greater manoeuvrability in dealing with the economic situation.

Written by P Vaidyanathan Iyer |
November 17, 2008 2:30:24 am

Prime Minister Manmohan Singh today said “inflation is now becoming less of a problem”, giving the government and the Reserve Bank of India room for greater manoeuvrability in dealing with the economic situation. After recording a stellar average GDP growth of 9 per cent over the last four years, India’s growth engine is expected to slow down to 7-7.5 per cent this year.

Speaking to reporters on board the special aircraft while flying home from what he described as a “very successful” Summit on Financial Markets and the World Economy in Washington, Singh said falling inflation will increase the scope for both (the RBI) in more aggressive use of monetary policy and (the government) in more aggressive use of fiscal policy.

Singh said he and Finance Minister P Chidambaram had anticipated a global slowdown on the horizon and budgeted for a very substantial amount of deficit to take care of the slack that has emerged now. “The fact that we have given record prices to the producers of wheat and rice; that Rs 71,000 crore worth loans have been written off… We have a very extensive programme for social service and infrastructure expansion,” he said.

“So, as far as our economy is concerned, I think, our fiscal stimulus is already on,” he said. The RBI too has cut the repo rate (the rate at which it lends to banks) by 150 basis points to 7.5 per cent and slashed the cash reserve ratio (the portion of deposits banks have to keep with the RBI) to 5.5 per cent so far. “If more liquidity is needed, we will do more,” Singh said. But as far as interest rates are concerned, he said it was the RBI’s preserve, but added, “This is an evolving situation… if we feel confident that inflation will not be a problem, there is scope for manoeuvrability.”

In fact, the Prime Minister pointed out that the inflation situation is turning out to be much better if one looks at de-seasonalised data than is evident from the year-on-year figures. While seasonally-adjusted inflation rate for the week-ended November 1 is not immediately available, the year-on-year inflation rate itself has dropped to single-digit levels after a gap of 21 weeks to 8.98 per cent. “Whatever is needed to keep the economy on an even keel will be done,” he added.

He said the biggest “positive gain” from the two-day summit was a clear indication of the increasing shift of the balance of power in favour or emerging economies.

“This is for the first time there was a genuine dialogue between major developed countries and major emerging countries. The western world, at long last has got to realise this reality,” he said.

The growing economic clout that developing nations, particularly China and India, wield in the global marketplace, is reflected again in their ability to help a faster recovery of the world economy. China, with foreign exchange reserves of $2 trillion, for instance, has offered to top up the International Monetary Fund kitty to help it support distressed economies.

Defending the summit’s effectiveness at a time when the US itself was in transition mode, Singh said the situation is so serious that the world cannot wait until January 20. “The financial crisis is now spilling over to the real economy and for the world to say that it will do nothing until then, I think, would not be a very responsible act,” he said.

In fact, according to the Prime Minister, President Bush, in his closing remarks, did touch on the subject of his relationship with the incoming administration. “He (President Bush) said that the coming administration has been fully briefed about what was happening and what will be the outcome,” Singh said, adding that Bush was hopeful there will be a broad convergence of views.

Singh also dispelled fears that relations between India and the US would not be as good when Barack Obama takes over as President. “I think, we have no reason to be apprehensive about the change of regime in the US. I think there is general recognition in the US regarding the role that India can play, India should play,” he said.

Singh said there is considerable appreciation in the US of the way the Indian economy is managed. “And more recently, also Obama did send, I think, Madeleine Albright and former Congressman Leach to interact with us. They have given us all the positive indication, so there is no reason to have any doubts about the intentions of the Obama administration towards India,” he said.

The Congress-led UPA government had managed the crisis well and Singh expected it would fare well in the upcoming general elections. “What I would like is, for the people of India to judge us by the response of our government to this crisis. We acted in time, and while the rest of the world is in doom and gloom, we will still maintain a growth rate of 7.5 per cent. Growth with stability, more socially inclusive growth is a reality and will remain a reality despite the onslaught of the adverse turn in our external environment,” Singh said.

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