Industry wants stimulus to continue, but govt may need to balance

India Inc wants the government to continue the stimuli that were offered after the global economic downturn surfaced to help halt the downslide of Indian economy, despite the quarterly GDP for Jul-Sept 09 recording a whopping 7.9% growth.

Industry contends that to a large extent the growth was being fuelled by the stimuli efforts of the government. The government had cut excise duty by 6% and offered some sector specific boosters like accelerated depreciation benefit for the transport industry to push the slowing Indian economy in wake of global downturn.

The Reserve Bank of India (RBI) too has been maintaining an ultra loose monetary policy with abundant liquidity in the system and record low policy rates which has helped bring market rate of interest down and boosted the performance of many sectors like auto and real estate.

However, the much higher than expected growth that the economy witnessed in September quarter has fuelled the exit debate. While many economists believe the government should start tightening things sooner rather than later to prevent overheating of the economy, the industry believes that it was too early to withdraw the stimulus.

Most of the companies in auto space, the sector that has been leading the recovery, feel that the low interest rates and ample availability of auto finance had been the key behind surging sales and any move to immediately tighten monetary policy by the RBI may take the momentum away from the sector.

Industry body CII too has supported the idea of continued stimulus saying it would be important for the RBI to maintain policy rates at current levels in order to prevent the growth momentum from slackening. However, not many economists would agree with it as the economy may face an inflationary shock in case monetary policy is allowed to remain too loose which would be more destabilising to recovery rather than RBI’s tightening of policy.

Economists feel that a middle path to the exit debate could be that the RBI takes a calibrated approach to tightening and first tries to suck the liquidity through some quantitative measures and at the same time ensuring that there was enough money in the system to fulfil India Inc’s requirements.

Similarly, the government might withdraw some of the tax cuts it offered last year, from some selective sectors in the next budget, but may allow others to continue for say another couple of quarters. Such an approach while would ensure that the economy does not overheats, it will also be largely neutral to growth.