Two steps forward

It is with relief that we note the co-ordinated fiscal and monetary packages announced yesterday. Yet that relief is tempered with concern over whether the packages go far enough, and about whether concerns that were beginning to be felt in the overly lengthy lead-up to the monetary expansion were completely unwarranted. The fiscal expansion is useful in that it provides space to the states, which are in a better fiscal position than the Centre, to provide much of the stimulus; there are also other elements to it, including the special measures for troubled real estate, and the promise to recapitalise public sector banks, which indicate that the finance ministry is paying close attention to the developing consensus on what measures to revive the economy should look like.

The monetary expansion, while equally welcome, is more problematic. The cut was, of course, necessary; questions will remain as to whether it went far enough, or whether it will have a sufficient impact. Some banks have already started cutting lending rates, and it is to be expected that that tide of credit will be provided something of an impetus by these cuts. While it may be hopeful to expect more action this fiscal year, let it be clear that room exists: inflation is lower than expected 8212; much lower, now just below 6.5 per cent, and inflationary expectations are similarly benign.

The co-ordinated nature of the packages is, in some sense, the most important aspect of the news. There had appeared to be a disconnect between the Reserve Bank of India and the finance ministry on the issue of the size and timing of the stimulus. The point is not that the RBI does not see things the way that the finance ministry does; the principle of central bank independence is one that all those of liberal views share. A problem exists only if the disagreement takes on overtones of a turf war between the central bank and the finance ministry. When, across the world, the structure of such packages has been extensively discussed and a near-agreement hammered out, the debate here should close as well. In particular, in the US, the heads of the Federal Reserve and the Treasury have stood together to take questions from lawmakers; in the UK, the head of the central bank has been similarly willing to co-ordinate with the Chancellor; and in the eurozone, the European Central Bank 8212; not an advocate of easy credit, at all 8212; has managed

to co-ordinate with half a dozen national governments. Mumbai ended national disagreement on terror laws; the financial crisis should have ended national disagreement on stimulus.