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Monday, November 24, 2008

Country faces 'difficult situation': FM

NEW DELHI: Faced with the global financial crisis and a slowing economy, India's monetary policy is biased towards stimulating growth, and the Reserve Bank of India (RBI) is likely to lower rates as inflation cools, the finance minister said.

"Taking note of the downturn in the inflation rate, RBI has lowered the policy rate as well as the reserve requirements. RBI's policy is now biased towards stimulating growth," Chidambaram said, referring to the Reserve Bank of India.

"If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favour of growth may deepen," he told a meeting with economic editors on Monday.

"I hope the worst is over," Chidambaram said on inflation, inaugurating the annual Economic Editors Conference here. The rate of wholesale price rise has declined to 8.90% for second week of November after touching 12.91% in early August.

Among the strategies to revive the business confidence, the government is contemplating increasing expenditure on infrastructure projects.

"Increasing expenditure on infrastructure is being contemplated" to address concerns over global slowdown," he said agreeing the country faces a "difficult situation".

Projecting a growth of 7-8% for current fiscal, Chidambaram said, "In our view, we may expect a moderation in growth rate in the current year."

Chidambaram said expansion would moderate this fiscal year after the world's credit woes arrived on India's shores and high interest rates to tame inflation trimmed demand.

But in a report prepared for the meeting, he said: "The circumstances continue to be largely favourable for sustained, rapid and more inclusive growth of the economy."

The finance ministry report prepared for Monday's conference said the economy was likely to slow in FY09 but growth of 7-8% would still be among the best given the financial crisis and a slowdown in major export markets.

Chidambaram said the government may have to "revisit and revive" pending reforms and he hoped credit flows would improve by the end of November or December.

He added the government may need one more year to meet its revenue deficit target but fiscal consolidation remains a priority for the government.

Under the Fiscal Responsibility and Budget Management Act, the government was expected to eliminate the revenue deficit and limit the fiscal deficit to 3 percent of GDP by the end of FY09.

But the government had set a lower deficit target of 2.5% of gross domestic product. However, heavy spending on schemes such as a debt write-off for millions of poor farmers and higher wages for government employees has threatened that.

The government is grappling with the impact of the global financial crisis on the broader economy and have taken several steps in recent weeks, including sharp interest rate and banks' reserve requirement cuts, to protect the economy.

Prime Minister Manmohan Singh said last week that despite an adverse international environment India could sustain growth of about 8% in FY09.

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