Financial reforms could still help India's economy grow 7.5-8.0 percent this fiscal year but with a sharp global downturn, monetary policy must shift further in favour of supporting growth, a top economic adviser said.
India's $1 trillion economy is grappling with the impact of the world's worst financial crisis in 70 years, with jobs being shed and factory output faltering after credit markets iced over.
Amid gloom in major export markets and a retail sector slowdown at home, India is expected to end the 2008/09 financial year in March with a growth rate well below the scorching 9 percent levels of the past three years.
But Arvind Virmani, chief economic adviser to the finance ministry, told Reuters policy changes could ease the pain and set up a recovery for the following 12 months.
"If we accelerate the (financial) reforms two things will happen. One, I think we can still have 7.5-8.0 percent growth in the current year," Virmani said in an interview.
"And secondly that we can still ensure, conditional on this policy reform, that the growth rate next year is higher than the current year."
Evidence is growing of a slowdown in Asia's third-largest economy and manufacturers have trimmed output and put expansion plans on the backburner. Indian policymakers have taken a slew of measures in recent weeks to shore up growth, including sharp cuts in interest rates and reserve requirements of banks.
ROOM FOR MORE RATE CUTS
Now annual wholesale price inflation below 9 percent has added to expectations of further rate action from the central bank to protect growth.
"So when inflation is on the way down and also there are greater concerns as represented for example by the index of industrial production numbers, the monetary policy has to shift accordingly," Virmani said.
He said he expected inflation to fall to normal levels by March 2009 from the current 8.90 percent, defining normal as around 5.0-6.0 percent.
The chief economic adviser said a freezing of India's credit market in the September-October period was unlikely to happen again but a careful watch was needed on liquidity.
Virmani said reforms in areas such as insurance and corporate debt must be accelerated but authorities needed to be careful about regulation at least for the next few years.
He said such reforms could unlock the country's huge savings which could then be used to meet the investment needs of the economy.
Banking reforms, raising foreign investment in insurance to 49 percent from 26 percent, and opening up the pension sector to foreign fund management firms are stuck in a maze-like legislative process.
Virmani ruled out any sovereign bond issue to get over the problem of tight funds in the face of the global crisis but said tapping investment from the Middle East should be explored. (Editing by Charlotte Cooper, Mark Williams and Stephen Nisbet)
Source : Reuters India