Tuesday, 18 November 2008

Govt promises steps to stimulate economy

NEW DELHI (Reuters) - The government will take steps to stimulate the economy to offset effects of the global economic slowdown, Finance Minister Palaniappan Chidambaram said on Tuesday, adding that he expected to end the fiscal year with decent growth.

India has already cut interest rates and taken a series of measures to boost liquidity in the banking system after the credit crisis spilled into its markets in October.

"We will take steps to stimulate the domestic economy to compensate for the downside caused by the downturn in the world economy," Chidambaram told the World Economic Forum's India Summit.

India was likely to end the year with a satisfactory growth rate despite the downturn in advanced economies, he said, although he declined to put an exact number on the expected rate.

"Next year, we will bounce back to a much better growth rate," he said, adding this could reach 9 percent by the second half of fiscal 2009/10.

Analysts are sceptical, however. Securities firm Macquarie said India's growth outlook faced downside risks due to the global crisis and gross domestic product (GDP) growth was seen slowing this fiscal year and next.

"On our current forecast, GDP growth is poised to fall to a seven-year low of 6.0 percent in 2009/10, from an estimated 7.2 percent in 2008/09," Macquarie analyst Rajeev Malik said in a note released on Monday.

Chidambaram later met Reserve Bank of India Governor Duvvuri Subbarao, after which central bank chief said he was watching the economy and would take the appropriate action at the right time.

Speculation about further interest rate action has mounted in recent days but a senior finance ministry official said any move by the central bank was unlikely in the immediate future.

Later in the evening, the government imposed a 5 percent import duty on a range of iron and steel products, and slapped a 20 percent duty on crude soybean oil imports to protect domestic producers in the face of falling commodity prices.


The finance minister also said the rupee would strengthen again once capital inflows pick up. "It's quite possible that in about a month or two the direction of flows can reverse ... and the rupee will settle at an appropriate level," he said.

The rupee slid 0.6 percent to its lowest in three weeks on Tuesday as foreign portfolio outflow worries gathered momentum after the stock market extended a slide into a fifth straight session. It ended at 49.66/67 per dollar, a touch stronger than a record low of 50.29 on Oct. 27.

Foreign funds have withdrawn $13.1 billion from Indian shares this year, adding to pressure on the rupee which is also weighed down by a widening trade deficit as export growth slows.

Indian policymakers have already taken several steps, including making sharp cuts in the central bank's key lending rate and banks' reserve ratios, to shield the economy.

The economy has grown at an annual rate of 9 percent or more for the past three years. However, many private economists see expansion of around 7 percent this fiscal year to March 2009.

Chidambaram said Asia's third-largest economy could miss its annual export target of $200 billion for this fiscal year as the slowdown in developed nations trims overseas demand.

He urged companies to cut real estate prices and prices of goods such as cars as a way to stimulate domestic demand, saying state-run banks had assured him they were ready to lend to borrowers.

He said it would be good if interest rates trended down although he cautioned that India had still not quite overcome the problem of inflation, which has fallen from nearly 13 percent in early August to single digits. Chidambaram said later he saw it heading lower in the next few months.

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