The Indian economy was on a cyclical slowdown after a five-year record boom and there are reasonable expectations that the economy will go for another strong growth phase after this brief slowdown. The impact of the current global crisis on India has been significant in terms of fiscal imbalances and the lower GDP growth rate, though India did not have direct exposure to sub-prime assets. It also dealt a severe blow to investment sentiments and consumer confidence in the economy. The policy response so far has been prompt in the form of monetary easing and fiscal expansion. However, this has sharply reversed the steady fiscal improvement over the past five years and weakened public finances considerably. This phase of fiscal expansion has to be wound down to ensure that macroeconomic stability is not threatened and the economy does not suffer from entrenched inflationary expectations and high capital costs, both of which will adversely impact the potential growth rate. Thus, an exit strategy will have to be carefully designed.
The objective of economic policy must be to maximize gains from global integration while ensuring a reduction in poverty and inequity. Therefore, a better way of responding to the crisis is to start the “second round of reforms” that are now overdue. The focus must now shift to promoting private investment, which can alone sustain rapid growth. It is hoped that the Thirteenth Finance Commission and the forthcoming budget will lay down a road map for bringing the fiscal balance back on the track laid down by the FRBM Act.
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