India's government is willing to further boost spending to prop up flagging domestic demand, says the finance minister, Palaniappan Chidambaram. The move risks attracting criticism that the ruling Congress Party is willing to add to the country's ballooning budget deficit to stave off a political slowdown until after next year's elections.
"The money, which is already being allocated, plus the supplementary demand must be spent in the next five months. If we need to spend more money, we will spend more money," Mr Chidambaram told India's NDTV news channel. China this month unveiled a 4 trillion yuan (Dh2.14 trillion) stimulus package, involving increases to government housing and infrastructure spending and tax cuts, the latest in a series of government responses to the crash of global credit markets.
In the past week, Mr Chidambaram and Manmohan Singh, the prime minister, have been increasingly vocal about their determination to protect India's economy from turmoil elsewhere, after a low-key approach during the early days of the financial crisis. On Friday, Mr Singh said he would take every measure to "neutralise to the maximum possible extent" the impact of the crisis on India, pledging that the country could continue to grow at about 8 per cent a year.
But economists warned that India's hefty deficit, at close to 5.9 per cent of GDP, made another fiscal stimulus unwise. Last month, the government received approval to spend 1.05 trillion rupees (Dh110bn) more than it budgeted for the year to next March, much of which would be swallowed up by a US$13bn (Dh47.7bn) write-off of farmers' loans and a wage rise for government employees. "The government doesn't have the ability to spend too much, unlike China and other countries which have more fiscal latitude," said DK Joshi, the chief economist at Crisil ratings agency. "If it is done at all, it has to be very judiciously done. You don't want to move from one crisis to another, you don't want to put yourself under fiscal strain."
India's government debt has soared this year as the administration held back from increasing the price of petrol, diesel, kerosene and LPG to match rising oil prices, issuing off-balance-sheet "oil bonds" to keep the state-controlled oil companies solvent. Mr Chidambaram has been under fire in the past week after a speech at the Indian Economic Forum in which he advised already cash-strapped Indian manufacturers to cut prices.
"Hotels must cut tariffs, airlines must cut prices, real estate must cut rates of apartments and homes they sell, car makers and two-wheeler makers must cut prices," he said. Several industrialists, including Rahul Bajaj, the chairman of motorcycle maker Bajaj Auto, said that margins were too tight to allow price cuts. Economists including Montek Singh Ahluwalia, the deputy chairman of India's Planning Commission, stressed that prices would come down as demand softened.
Mr Joshi said that as oil prices were dropping, the government would be able to start to trim the budget deficit. But he said that India was likely to target any economic stimulus at specific industries, such as textiles or infrastructure, instead of launching a broad stimulus like China's. Unlike China, where the stimulus package will target infrastructure, India's spending on infrastructure is falling, as investors involved in public-private partnerships struggle to raise finance.
Mr Chidambaram last week promised "concrete measures" to help the textile industry, which has been one of the worst hit by the global slowdown. A banking industry source said the government may also provide some funds to the banking sector, which has been holding back on lending. The Reserve Bank of India is asking banks to increase their capital adequacy ratios above 12 per cent, and some banks may need a small cash injection to reach that level, the source said.
* The National