Government should monetise deficit to boost private investment: CII

The Confederation of Indian Industry (CII) has asked the government to monetise its ballooning debt to aid investment even as the Asian Development Bank has said the Indian government has little scope for fiscal expansion other than lowering interest rates further.

With two successive stimulus plans announced by the government failing to bring the desired results, the CII said underlined the need for easier finance and increased investments to sustain the economic development in India.

While the two stimulus packages unveiled earlier by the government have helped the textile, gems and jewellery and construction sectors in India, Srinivasan said still more measures should be taken to put these sectors back on the growth path.

Monetising the ballooning fiscal deficit of the government would increase private investment and boost the slowing economy, despite the negative effects of inflation and sovereign downgrades, he said.

India's consolidated fiscal deficit, including state deficits and off-budget items, is projected to rise to 10 per cent of the country's gross domestic product and private sector fears that the pressure of government borrowing is weighing on private sector investments.

The government has planned additional borrowing to the tune of Rs240,000 crore by September, two-thirds of its full-year target, and CII fears government spending will overshoot, pushing benchmark bond yields upwards and putting pressure on banks' interest rates.

"Monetising the deficit and improving the currency flow is very important,"  Srinivasan told reporters at a news conference.

"Otherwise what happens with such a high level of deficit is you'll find investment drying up in the country .... If borrowing does not take place, investment does not take place, economic growth won't take place also."

He said bank credit to industry tends to be scare and expensive despite the Reserve Bank of India cutting its policy rates and reserve requirements of banks, Srinivasan said.

India's key short-term interest rate is at an eight-and-half year low of 5.5 percent, but outstanding loans have grown a mere 5.8 per cent in the last six months, RBI data shows.

Banks are also not lending even a third of their new deposit accruals despite the recent reduction in lending rates, according to latest estimates.

India's growth in 2008/09 is expected at 7 percent or lower, compared with 9 percent or more in the past three years. Some have pegged growth in 2009/10 at as low as 6 percent.

While the law prohibits the RBI buying debt directly from the government, the central bank said the government should also avoid private placement of such debt.

The CII demand comes amidst comments made by the Asian Development Bank that India has little room for more fiscal measures to stimulate a slowing economy, but the current easing of price pressures has created space for further monetary easing.

In its outlook for 2009, the ADB said it expects the Indian economy to grow at around 5 per cent in fiscal 2009-10 against an estimated 7.1 per cent for fiscal 2008-09 ending 31 March.

While India has undertaken timely and decisive stimulus to arrest the decline in GDP growth, "Right now there is limited or no fiscal space for more stimulus," Bruno Carrasco, a director at ADB's South Asia department, said, adding the country needs to get back to fiscal consolidation path soon after an economic rebound.

ADB expects the Indian economy to rebound and expand 6.5 per cent in 2010-11, but said prolonged recessions at major industrial economies could hamper India's recovery.