India admits it has no fiscal firepower

New Delhi: India’s finance minister admitted on Monday that the government had no scope to increase public spending to spur the flagging economy, but said interest rate cuts might be possible.

Shock economic growth figures published last Thursday showed the Indian economy growing at 5.3 per cent in the January-March period, the slowest quarterly growth figure in nine years.

India unveiled a huge stimulus programme after the last global slowdown following the financial crisis of 2008 in the US and Europe, but its finances are now strained as the Eurozone debt crisis gathers pace.

“The second round of global uncertainty and the slowdown has come rather quickly on the heels of the previous one, with practically no headroom for running a proactive fiscal policy,” Finance Minister Pranab Mukherjee said on Monday.

The government is under pressure to rein in subsidies and other spending after its budget deficit widened to 5.75 per cent of gross domestic product in the fiscal year ended March 31.

For 2012/13, the government is targeting a deficit of 5.1 per cent, but analysts say this is based on a very optimistic growth estimate of 7.6 per cent and under current spending plans the gap could be much larger.

Mukherjee argued however that the rapid fall in global crude oil prices, which are now under $100 a barrel, could help the central bank cut interest rates further because inflationary pressures will decline.

The Reserve Bank of India has more room to cut interest rates after economic growth slowed and oil prices dropped, even as inflation pressures remain, Deputy Governor Subir Gokarn reiterated on Sunday.

The factors “that are suggesting more room are growth somewhat lower than expectations, that may have a positive impact on core inflation,” and a decline in oil prices, Gokarn told reporters in Mumbai on Monday.

India’s economy has been hurt by political gridlock that has deterred investment, elevated inflation and slowing exports, with gross domestic product growth slowing to a near-decade low of 5.3 per cent last quarter. Gokarn said “some factors suggest inflation will remain” and that policy makers will have to balance these variables.

Meanwhile, a sharp slowdown in India’s foreign trade added to the woes of Asia’s third-largest economy and piled more pressure on the weak coalition government to take steps to boost economic growth.

Indian exports inched up 3.23 per cent to $24.5 billion in April from a year earlier after falling in March, data released on Friday confirmed, a far cry from the more than 20 per cent growth recorded in recent years.

India has been hit by falling demand from its traditional export markets such as the United States, which is struggling to bring down unemployment and Europe, where a sovereign debt crisis tipped many economies back into recession.

The export figures compounded an already gloomy economic picture — GDP data on Thursday showed the economy grew at its slowest pace in nine years in the first three months of 2012. The rupee has also tumbled to record lows this week.