Rollback of fiscal stimulus

This year’s Union Budget is certainly not the appropriate time to roll back the fiscal stimulus packages. It is indeed true that the worst phase of economic slowdown is behind us and demand has picked up substantially across sectors like IT/ITeS, cement, steel, auto etc. Bottomlines of companies have been improving since the Q3 of this fiscal, some of which were drastically hit by the slowdown. GDP has expanded by 7% in the first half of this fiscal (2009-10) and exports are slowly turning positive. With industrial production and services sector gaining strength, business sentiment and consumer confidence have just began to improve. The economic recovery, however, is still very much a work-in-progress and the green shoots need continued nourishment in the form of fiscal stimulus and expansionary monetary policy measures. A sudden and complete withdrawal may push the manufacturing and services sectors into another deep slump.

The ballooning fiscal deficit of 6.8% in 2009-10 (estimated) is ominous and India is far short of its FRBM (Fiscal Responsibility and Budget Management) targets. The fiscal deficit is supposed to remain high even in the next fiscal as the government may fall short of its target revenue collections. Withdrawal of fiscal stimulus is inevitable but the timing has to be right. Overall levels of inflation still don’t justify the withdrawal of stimulus packages though food prices are at an 11-year high, primarily owing to severe supply-side constraints in the agricultural sector. Hence there is need for a phased withdrawal from the beginning of Q2 of 2010-11.