Stimulus Exit Will Be Dangerous For Growth (01-Feb-2010)
Ficci warned it will be dangerous for economic growth and employment if the fiscal incentives given to boost economy were withdrawn.
This was said by it since RBI had earlier advice to the government to take back some of the stimulus measures.
Ficci''s comments come at a time when everyone is counting days for the big day of Budget, likely on February 26.
However, Ficci Secretary General Amit Mitra stated that it is a difficult choice between promoting growth and containing fiscal deficit, which, due to duty cuts and increased public expenditure is at over 6% for the current fiscal.
He said he expects Finance Minister Pranab Mukherjee to "lean on the side of growth".
He said if interest rates rise due to this then these steps would be proved to be "premature", pointing out that RBI has already started withdrawing from accommodative policy.
Meanwhile, if fiscal stimulus is also started to be rolled back it would be dangerous while this way you will hurt both economic growth and employment generation.
Mitra further pointed out that RBI has itself said in its monetary review the recovery process is not yet broad-based.
Moreover, reflecting that domestic and overseas economies are yet to recover fully, he said exports and imports are still not rising while for SME sector, projects are not taking off in large numbers as interest rates are high.
On the other hand, the RBI had said in its monetary review that “For short-term economic management and medium-term fiscal sustainability, it is imperative that government returns to a path of fiscal consolidation. The consolidation can begin with a phased rollback of the transitory components."
Previously, the Reserve Bank of India (RBI) stated that the timing of withdrawing the monetary and fiscal stimuli given to boost the economy poses a challenge to the government along with the apex bank.
It said that there are several challenges on the way forward, including the timing and sequencing of exit from the expansionary fiscal and monetary policies.
Moreover, Ficci stated that withdrawal of the stimulus packages given to soften the economy from the impact of the global crisis, will impact industrial growth that has optimistically responded to these fiscal incentives.
The pattern of growth witnessed in the sub-sectors of the industry indicates the optimistic response of the entire industrial sector to the stimulus measures.
Meanwhile, in order to sustain the growth impulses in the economy, industry and commerce bodies urged Finance Minister Pranab Mukherjee to continue with the stimulus package in his budget for 2010-11.
Federation of Indian Chambers of Commerce and Industry (FICCI) President Harsh Pati Singhania in his memorandum to the Finance Minister voiced against tightening of monetary policy.
Since a failure to contain food price inflation would derail the growth process and adversely impact the industrial sector.
Mr. Singhania sought to claim that real investment activity was yet too take place at the desired level and said that a sustainable recovery would itself help the government meet its FRBM (Fiscal Responsibility and Budget Management) targets.
However, earlier, the finance minister Pranab Mukherjee said that the government is unlikely to exit the stimulus packages currently.
Mukherjee said, "Exiting from the stimulus packages now may not be the correct approach because if the world economy collapses, the depression would be deeper. I am not hinting at anythingâ€.
In economics, fiscal policy is the use of government spending and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money.
The possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy, and inflationary effects driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would have otherwise been idle.
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