Budget to herald rate cut, stimulus

Posted: Feb 05, 2009
New Delhi: The upcoming interim budget is unlikely to have a policy wand to beat the global slowdown, but the Centre is committed to raising outlays substantially in 2009-10 to manage the crisis. The Government also hopes that the Reserve Bank of India will cut rates after the budget is presented on February 16.

“The fiscal stimulus needs to continue in 2009-10 as well. Despite dwindling revenue, there is a case for another stimulus package. The Plan expenditure will part-finance the next stimulus package,” Planning Commission deputy chairman Montek Singh Ahluwalia said on Wednesday.

“The vote-on-accounts is usually calibrated around the existing level of expenditure. And we will be following the practice. But the Planning Commission is of the view, and I don’t think anyone disagrees with it, that the Plan outlay for 2009-10 will have to be substantially higher because of the need for a fiscal stimulus,” Ahluwalia said.

Commission member Abhijit Sen pointed out that the Eleventh Five-year Plan has a much higher expenditure outlay. “Since there is a back-ended spending plan, there will be more expenditure in the last two to three years (of the Plan). The exact timing of the expenditure is, however, not decided. We are hoping that the Eleventh Plan expenditure target will hold good,” he said.

“The fiscal deficit for 2008-09 will be higher and we can not go back to normal deficit levels,” Ahluwalia said. The Prime Minister’s Economic Advisory Council expects the Centre’s fiscal deficit to go up to 8% of GDP in ‘08-09, including off-budget items. Till December end, the Centre’s fiscal deficit was up 163.8% of the full year target.

Direct tax collections by January 2009 have risen by a mere 13.21% to Rs 2,47,396 crore—over Rs 1 lakh crore short of the budget estimate of Rs 3,65,000 crore for 2008-09 (later revised to Rs 3,95,000 crore).

Prime Minister’s Economic Advisory Council chairman Suresh Tendulkar said that cutting lending rates further is ‘desirable’ but RBI may wait for the interim budget. “Possibly they will wait for the vote-on-account or interim budget to gauge the fiscal situation,” Tendulkar said. “In the light of that, they may decide to cut rates.”

RBI had cut its key lending rate or the repo rate by 350 basis points to 5.5% after October but left rates unchanged at its third quarter review of the monetary policy on January 27.