labels: Economy - general
World Bank chief economist wants India to boost spending news
14 March 2009

India has scope for more monetary measures and enough fiscal space to boost spending, according to World Bank chief economist Justin Yifu Lin.

 Countries should not worry about the deficit levels during the present economic crisis and should instead step up spending on bottleneck-removing projects, Lin told reporters in New Delhi.

''India has a lot of bottlenecks. If India can use the opportunity to invest in bottleneck-removing projects, it will generate demand, create jobs and a growth of 5-6 per cent will be maintained. After the crisis, 9-10 per cent growth can be maintained for decades,'' said Lin.

 ''Apart from sources such as World Bank, it (India) still has some scope from the fiscal channel. If you invest, deficit will increase but it will increase growth and generate revenue. Deficit will be a short-term phenomenon,''Lin said.

He said the other option was to use forex reserves of close to $250 billion, especially because inflationary pressures have eased. ''The returns will be higher as (input) costs have come down,'' he added.

''In my view, 2009 is shaping up to be a very dangerous year. I think we need to expect that we will face waves of challenges,  World Bank Group president Robert B Zoellick said in London yesterday.

''Unfortunately, 2009 is also a year of firsts. It will be the first global GDP decline since World War II.  It will be the first trade decline of this size in 80 years, and it is the first time that recovery must be global'' he added.

 A few days ago, the Reserve Bank of India released  the first tranche of $250 million (about Rs1,250 crore) to IIFC Plc, the UK subsidiary of India Infrastructure Finance Company (IIFCL). The funds would be used to part-finance import of capital goods by Indian companies in the infrastructure sector.

Lower inflation had also created scope for central banks to reduce interest rates further and advocated that money supply should be increased, Lin said.

''In developed countries, people anticipate an increase in taxes in the coming years and, therefore, may increase savings. So, the demand may not increase much… If we can find projects that can generate high returns in the future, the fiscal stimulus will have a larger impact,'' Lin said.

He added that higher real sector demand would also help in dealing with bad debt and putting banks on the recovery path.

The World Bank chief economist also warned that the global economy might contract this year and said that there was a high risk of the present economic crisis getting prolonged.

The World Bank earlier said that developing countries face a financing shortfall of $270-700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty.

In a paper for next Group of 20 finance ministers and central bank governors meet, the World Bank said international financial institutions cannot by themselves currently cover the shortfall for these 129 countries, even at the lower end of the range.

''We need to react in real time to a growing crisis that is hurting people in developing countries,'' said  Zoellick.

''This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis. We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest,'' Zoellick said.

The global economy is likely to shrink this year for the first time since World War II, with growth at least 5 percentage points below potential. World Bank forecasts show that global industrial production by the middle of 2009 could be as much as 15 per cent lower than levels in 2008. World trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia.

''Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery,'' Lin said.

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World Bank chief economist wants India to boost spending