Silver clouds

What does this data mean for the fiscal and monetary stance? Finance Minister Pranab Mukherjee can roll back some of the fiscal stimulus of last year. He will,however,still have to be cautious,because,as the quick estimates released by the CSO a few days ago showed,there are concerns. In 2007-08,the investment to GDP ratio in India was 38.2 per cent. The sharp rise in this ratio since 2002 was the prime engine of growth in the Indian economy. In 2008-09,the investment to GDP ratio fell to 34.9 per cent. The decline can be attributed mainly to the decline in private investment. The details of investment in 2009-10 are not available yet,but according to the CSO estimate,gross fixed capital formation is expected to grow by 8.4 per cent in 2009-10,compared to 12.7 per cent a year ago.

The finance minister also has to worry about the fiscal deficit. There are many elements of government expenditure where the government has few degrees of freedom. For example,administrative expenditure,salaries and interest payments are obligatory. Once subsidies have been initiated,they are very difficult to roll back. If the recommendations of the Parikh committee on oil prices are accepted,it would reduce some of the deficit. But if the government continues to set oil prices,there could be an increase in subsidies in case oil prices rise further during the year. Tax revenue growth will not rise unless industry grows much faster. The finance minister can roll back some of the excise duty cuts made after the crisis. But more than a few rollbacks,the government may have to rely on disinvestment numbers to get a lower number for fiscal deficit. In terms of the fiscal deficit figures in percentage terms,since thats what the world worries about,the change in the GDP base year implemented by the CSO last week,which makes the denominator bigger,will help make the deficit ratio smaller.