India weathered the global economic slowdown much better than most economies worldwide with the help of timely fiscal stimulus measures introduced by the government. With the Indian economy showing clear signs of recovery, the cry for the stimulus withdrawal is gaining ground. The unprecedented food price inflation is forcing government’s hands in the issue.
Recently International Monetary Fund has said the Indian authorities should consider reversing measures as economic recovery is gathering pace. Kalpana Kochhar, the India mission chief at IMF said, “We see the growth picking up and becoming broad based. Now is the time to gradually withdraw the stimulus measures.”
According to Kochhar, removing the fiscal incentives, introduced to boost consumption, would help free up resources needed for essential social spending.
As a first step in this direction, the Reserve Bank of India began tightening its monetary policy by raising cash reserve ratio of banks during its policy review last week.
There is also threat of continuing stimulus stoking inflation. When the stimulus measures were introduced in the late 2008 and early 2009, it helped in propping up the demand, which helped the economy no end. However, the failed monsoon resulted in imbalance of demand and supply, resulting in price inflation. Over-stimulus can harm the economy.
However, putting an abrupt end to stimulus measures may do more harm than good. A phased withdrawal, after ensuring that the growth is indeed sustainable is considered the perfect solution to the problem by experts.
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