Fiscal stimulus bearing fruits: FM

Finance Minister Pranab Mukherjee said that some positive signs are emerging for the Indian economy. Production of major steel producers registered a growth of 13% in June 2009 (YoY). Cement production increased by 13.1% in June (YoY). Sales of automobile sector have registered a growth of 14.3% in June. This was driven by the demand in two wheelers at 17.4% in June.

"This reflects greater purchasing power with the middle income groups, easier availability of credit and affordability," the Finance Minister said. Consumer goods continued to record a double-digit growth at 12.4% in May over the corresponding period of the previous year, he said. Number of mobile phone connections in May increased by 49%. Approximately 12mn new mobile connections were added during the month.

Mukherjee said that the Government’s fiscal stimulus since December is showing positive results, though the economy is still not out of the woods. "These are small beginnings that show that our strategy to generate internal demand is responding," he said. "In the medium term, we should have clear objectives and come back to the path of fiscal discipline." In recent weeks, there have been some concerns on the progress of monsoon, Mukherjee said. The Government is monitoring the situation on a daily basis and is ready to implement its contingency plan, if required, he added.

"What is required right now is to achieve high growth in the shortest possible time," Mukherjee told the Rajya Sabha, urging them to support the finance bill. "This level of deficit is not sustainable and we shall correct it soon." The Lok Sabha passed the budget on Tuesday. The Finance Minister said that the widening of the deficit won’t crowd out borrowing needs of private companies, adding that the Centre was working in tandem with the RBI to ensure that enough money is available with the banks to lend to companies and households.

The Finance Minister also said "it is essential that we come back to the path of fiscal prudence without compromising our growth momentum as soon as the current economic circumstances permit us to do so". Fiscal prudence is critical for maintaining a stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment, he said.

As indicated in the medium term fiscal policy statement, required under the FRBM Act and placed as a part of the budget documents, the fiscal deficit is expected to come down from 6.8% of GDP in FY10 to 5.5% in FY11 and further to 4% in FY12, Mukherjee said. Correspondingly, the revenue deficit is expected to decline from 4.8% of GDP in FY10 to 1.5% in FY12, he added.

Noting the serious concerns voiced on the implications of the Government’s borrowing programme, the Finance Minister said that the net market borrowing requirement for FY10 through GoI dated securities works out to Rs3.98trillion. The actual net borrowing through Government securities in FY09 was Rs2.21 trillion. Notwithstanding the increased borrowings in the current year, the cost of borrowing has been significantly lower so far, he said.

During the first half of FY10, the Government's market borrowing is being supported by RBI through its Open Market Operations (OMO), Mukherjee said. It has to be understood that the OMO should not be confused with monetisation of government borrowings and that the Centre has no intentions of monetising its debt, he emphasised.

On the disinvestment of Public Sector Units (PSU), he said that the President’s Address to the Joint Session of Parliament on 4th June had clearly spelt out the policy of the UPA on disinvestment. Which is that the Government would develop people-ownership of public undertakings while ensuring that its equity does not fall below 51% and the Centre retains the management control. The Finance Minister said he had reiterated the same in his budget speech.

"It is our intention to enable the PSUs to benefit from techno-managerial efficiencies and become more competitive in the market. My Ministry has initiated discussion with other Ministries and Departments for identifying the PSUs where a portion of Government shareholding can be sold and for issue of fresh equity to meet their fund requirements. The details are being worked out and would be announced in due course," Mukherjee said.

On infrastructure, he said it is a high priority area for the UPA. Investment in infrastructure will raise the capacity for rapid growth and employment generation, he said. Rural infrastructure is of special importance, as it will disperse incomes and bring prosperity in the rural areas. Through the four fiscal packages announced so far (including the budget), the Government has given an overall stimulus of nearly Rs2.18 trillion to the economy. Bulk of this is being directed towards investment in infrastructure, both urban and rural, as well as ‘Aam Admi’ centric programmes, like NREGA, Pradhan Mantri Adarsh Gram Yojana, Bharat Nirman, etc.