Tagged: Fiscal consolidation

Govt offers export sops, but hobbled by fiscal needs

Reuters | Aug 23, 2010 | 6:44pm IST

India on Monday offered incentives to some exporters to help them tide over an uncertain and “fragile” global economic recovery, but said fiscal consolidation might not allow continued support in the future. Trade Minister Anand Sharma, who unveiled the country’s annual foreign trade policy, also said the government would continue to restrict exports of certain food items as it deals with double-digit food inflation. India’s exports, which make about one-fifth of its economy, returned to double digit growth in November after last year’s prolonged slump. However, the pace of growth in the sector slowed to an annual 13.2 percent in July from 30 percent a month ago, reflecting a dampening base effect and demand contraction in Europe and the United States, with the government forecasting an uncertain outlook for the sector over the next six months.

“There is still a shroud of uncertainty over the fragile nature of global economic recovery. Even as global economic rebalancing is proceeding apace, it is not going to be an easy patch for our exporters,” Sharma said. “We also have to be conscious of the need for and the inevitability of fiscal consolidation,” he said. “Suffice it to note that the level of resources available today may not be available in the future.” India has been saddled with a high fiscal deficit and aims to cut the deficit to 4.1 percent of GDP in 2012/13 from 5.5 percent projected for this fiscal year.  The need for fiscal prudence stopped Sharma from providing incentives for all export-oriented sectors and instead focus on labour-intense industries and those which are important for capacity expansion in the economy.

As part of the new incentives, the government will allow duty free imports of capital goods until end-March 2012 and provide an interest subsidy of 2 percent to textiles, leather and jute industries for 2010/11. It will also continue to refund taxes paid as custom duties until end-June 2011. Sharma said the additional export incentives would cost the government $214 million in the current financial year. Continue reading

INDUSTRY VIEW: RBI raises key rates

MSN News | Reuters | 27/07/2010

The Reserve Bank of India on Tuesday raised interest rates more forcefully than expected in the face of inflation that has held stubbornly above 10 per cent for the past five months. The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 per cent, in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 basis points to 4.50 per cent. Following are the views of industry officials to the policy.


"The rate hike is well warranted and there should not be any problem until the rate of economic growth continues to be robust. There will be a slight impact on interest rates, but I believe, everybody is prepared for it."


"The rates will firm up. This may lead to a liquidity crunch in domestic market in the coming months as many large projects are still rupee-funded. I do not think the OEMs (original equipment makers) will accept an increase in component prices because of a rise in rates. The only way we can compensate is increasing our volumes and scale of operations".


"In our case we have tied up the funds with a fixed rate for next three years, anticipating the tightening. We won’t be impacted at all. For the infrastructure (sector), it’s a counter-productive move on a long-term basis if the interest rates are hiked for the growth sector."


"RBI has increased reverse repo by 50 basis points and repo rate by 25 basis points. CRR has remained unchanged at 6 per cent. Market anticipated much more tightening than what has been announced. As such we feel no negative impact on our sector for the action taken by RBI." 

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Euro Breakup Talk Increases as Germany Loses Proxy

Bloomberg | May 14, 2010 | 11:47 EDT

Romano Prodi, former Italian PM Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said. When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. “To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,” Prodi, now 70, said. Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending.

The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank’s independence and mounting speculation that a currency designed to last forever might break apart. “You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.” German-led northern Europe, with its zeal for budget discipline, is attempting to fix the mistakes made by the euro’s founding fathers in the 1990s. It is squaring off against the governments of the south over who will control the euro and the ECB; whether the currency will be used to promote growth or squelch inflation, and ultimately, whether some countries should be disbarred from the monetary union.

European Club

What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default. “There was no discussion of that at all, of a crisis  

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RBI lifts key rates, CRR; signals more tightening

Reuters | Tue Apr 20, 2010 | 3:04pm IST

The Reserve Bank of India (RBI) on Tuesday raised key interest rates by 25 basis points, as expected, to battle near double-digit inflation, signaling gradual tightening ahead to sustain growth and manage record government borrowing. The Reserve Bank of India’s measured steps, which included raising the cash reserve ratio (CRR) requirement for banks by 25 basis points, increased the likelihood of another rate rise before its next quarterly review in July, some watchers said. The yield on the 10-year benchmark bond traded at 8.01 percent, down 7 basis points on the day, after easing to 7.98 percent after the RBI announcement, its lowest since April 13, as some players had bet on a bigger 50 basis point rise. The main 30-share BSE index was up 0.4 percent.

"The policy statement is not hawkish enough to address the concerns on the inflation front," said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai. Price pressures are spreading beyond food to costs of fuel and manufactured goods such as cars. March inflation reached 9.9 percent year-on-year, its fastest pace in 17 months. However, the RBI is under pressure from the government not to raise rates aggressively, with New Delhi worried it could dent economic growth and also complicate its borrowing, which will reach a record $100 billion in the current fiscal year. "RBI at this juncture is more constrained by the management of the government’s record borrowing programme," Nitsure said.

The RBI is expected to raise rates by a further 100 basis points over the next 12 months, according to the one-year overnight indexed swap (OIS) rate at 4.95 percent. That is in line with a Reuters poll ahead of Tuesday’s review, which forecast 100 basis points of tightening by the end of 2010. "The next scheduled  

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IMF paints grim picture of fiscal tightening needs

Reuters | Sun Mar 21, 2010 | 9:12am IST

Developed countries with big budget deficits must start now to prepare public opinion for the belt-tightening that will be needed starting next year, the No. 2 official at the IMF said on Sunday. John Lipsky, the International Monetary Fund’s first deputy managing director, said the scale of the adjustment required was so vast that it would have to come through less-generous health and pension benefits, spending cuts and increased tax revenues. "Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery," Lipsky told the China Development Forum. "Already in several countries with particularly high debt and deficits, sovereign risk premia have risen sharply, imposing strains for the countries affected and raising risks of possible broader spillovers," he said in remarks prepared for delivery to the conference.

For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, but consolidation should begin next year if the global economic recovery remains on track. First, policymakers should already be making it clear to their citizens why a return to prudent policies is a necessary condition for sustained economic health, Lipsky said. The IMF estimates that, by raising real interest rates, maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually. Second, fiscal institutions must be strengthened to withstand adjustment fatigue. Options include reinforcing fiscal responsibility   

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S&P lifts India outlook; inflation still a concern

Reuters | Thu Mar 18, 2010 | 5:22pm IST

Standard & Poor’s lifted its outlook on India to stable from negative on Thursday, citing an improving fiscal position and strong economic growth but warned on inflation, giving a filip to stock and bond prices. A deputy governor at the Reserve Bank of India said the Reserve Bank of India (RBI) was open to taking policy action ahead of its April 20 policy review. With headline inflation nearing 10 percent, the RBI is under increasing pressure to raise interest rates for the first time since the global downturn. Earlier in the day, the government reported food inflation eased for the second straight week in early March but fuel inflation rose. In affirming its "BBB-" long-term and "A-3" short term credit ratings on India, S&P said the government remains constrained by a high debt burden and deficit, and said inflation is a worry. "In our opinion, the recent high inflation rate could also derail the stable macroeconomic and interest rate environments," S&P credit analyst Takahira Ogawa said in a statement.

On Monday, India reported headline wholesale price index (WPI) inflation of 9.89 percent for February. Analysts said WPI would cross into the double digits by March before retreating over the next few months, but a pick-up in economic growth would keep WPI at high levels for the rest of the year. India’s 10-year bond yield fell 4 basis points after S&P raised the ratings outlook for India, while the 5-year swap rate shed 3 basis points. The 30-share BSE index ended up 0.2 percent. The partially convertible rupee was little changed. RBI Deputy Governor K.C. Chakrabarty said evidence showed demand factors were beginning to fuel inflation. Another Reserve Bank of India deputy governor had said previously that the Reserve Bank of India was unlikely to make a policy change outside its quarterly cycle except in the case of unforeseen developments.    

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India to review economy stimulus

BBC News | 07:54 GMT | Friday, 26 February 2010

India’s government said stimulus measures introduced to boost growth during the downturn would be reviewed, as it unveiled its annual budget. The measures helped to maintain strong growth over the past year, but the authorities now say that rising prices must be controlled. The government projected an 8.7% growth rate for the current fiscal year. Federal finance minister Pranab Mukherjee said the challenge was to return to 9% growth. India’s economy is recovering faster than expected – it grew at an annual rate of 7.9% in the three months to the end of September 2009, after growing 6.7% in the year to the end of March 2009. Strong growth in India’s manufacturing sector is also helping to compensate for falling agricultural output.

Mr. Mukherjee said the economy was now in a “far better position than a year ago”. “We need to reduce the stimulus, important to the economy, and move towards the preferred path of fiscal consolidation,” he said. Mr. Mukherjee stressed the need to cut fiscal deficit, review public spending and cut public debt. The government also announced plans to introduce a Goods and Services Tax and reform direct taxes in April 2011.

Finmin urges fiscal discipline; bond market wary

Reuters | New Delhi | Thu Feb 25, 2010 | 7:46pm IST

The government should start rolling back its economic stimulus and cap its debt, the finance ministry said on Thursday, forecasting economic growth in years ahead strong enough to make its fiscal targets look achievable. A day ahead of the annual budget, India proposed to more than halve its fiscal deficit to 3 percent of GDP by the year ending in March 2014 and said economic growth should reach 8.5 percent in the year starting in April and accelerate thereafter. “There seems to be a view that they can grow their way out of fiscal purgatory, rather than making large cuts to the absolute level of the deficit,” said Brian Jackson, senior emerging markets analyst with the Royal Bank of Canada in Hong Kong.

A government panel pegged the fiscal deficit for the next financial year at 5.7 percent of GDP, slightly higher than the 5.6 percent forecast by economists in a recent Reuters poll. Bond yields jumped late in the day after Planning Commission Deputy Chairman Montek Singh Ahluwalia said strong growth in 2010/11 could absorb higher borrowing, raising concerns that the government may look to tap bond markets for more than had been expected. The yield on the benchmark 10-year bond ended at 7.83 percent, up from Wednesday’s close of 7.80      Continue reading

Budget risks disappointing on fiscal discipline

Reuters | Tue Feb 23, 2010 | 12:34pm IST

Anything less than a strong show of deficit-slashing intent in the budget, to be unveiled on Feb. 26, is likely to disappoint investors. With its economy booming anew, India is well-positioned to wean itself from aggressive deficit spending that risks driving up funding costs, crowding out private borrowing and scaring away overseas investment desperately needed to fund infrastructure. “If you can’t do fiscal consolidation when the economy is strong, when can you do it? This is the time to do it,” Stephen Roach, Asia chairman of Morgan Stanley, said recently in Mumbai.

Finance Minister Pranab Mukherjee is widely expected to initiate a gradual pull-back of stimulus measures when he unveils the budget for the next financial year on Feb 26, but will stop short of curtailing spending or borrowing. Instead, Mukherjee will hope accelerating growth, improved tax receipts and the sale of government assets provide enough new revenue to avoid unpopular spending cuts and yet allow him to lower a deficit poised to hit 6.8 percent of GDP this year, which would be a 16-year high. Inflation approaching double-digits, meanwhile, is expected to prompt the Reserve Bank to raise interest rates by late April, bringing up borrowing costs and adding pressure to cut the deficit.    Continue reading

Economy can grow 7.75 pct in FY10, inflation a challenge

Reuters | NEW DELHI | Wed Dec 23, 2009 | 1:16pm IST

The economy could grow at a faster pace in 2009/10 compared with the previous year although inflation and high fiscal deficit are major challenges for the government, the finance minister said on Wednesday. Surging food prices and faster industrial growth have pushed up headline inflation, putting pressure on authorities to take steps such as importing food items and raising the cash reserve ratio for banks and interest rates to check inflation. The outlook for economic growth during the December and March quarters looked better than previous quarters, Finance Minister Pranab Mukherjee said, adding the economy could expand around 7.75 percent for the full fiscal year that ends in March 2010.

“It would be more appropriate to say that it (growth) would be around 7.5 to 8 percent,” Mukherjee told an industry conference. A 16-year high fiscal deficit of 6.8 percent of gross domestic product projected for 2009/10 (April-March) increased borrowing needs to a record 4.51 trillion rupees and kept bond yields firm this year. “Some of the important issues and challenges in the short-to-medium      Continue reading