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India's fiscal woes to ease - Views on News from Equitymaster
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  • Mar 25, 2009

    India's fiscal woes to ease

    KG gas to ease India's fiscal deficit
    At a time when most investors are crying hoarse over India's burgeoning fiscal deficit, a leading business daily has some good things to say about it. As per the daily, commencement of gas production in India's prolific KG basin could shave off a few billions from the government's expenditure and provide some additional head room. Not only this, the gas supply is also likely to lead to investments to the tune of US$ 10 bn towards augmentation of India's gas transmission and distribution infrastructure. Any benefits though are likely to flow over the medium to long term. India's fiscal deficit, which is likely to touch 6% of GDP (excl. state deficits and off balance sheet items like oil bonds), has remained a sore point amongst foreign investors in recent times, even prompting them to favour other developing economies like China and Brazil for investment consideration. With the gas supply likely to come onstream as early as this year, India's import bill could fall by 1% in FY10 and an average of 3% over fiscal years 2011-2014, the daily said.

    Enough room to loosen monetary policy further
    While India's fiscal deficit maybe an eyesore to many, Mr. Ahluwalia, Deputy Chairman of the Planning Commission has a different opinion. He feels that despite the high deficit, India may need to engage in another round of fiscal stimulus so that GDP growth does not fall sharply in the fiscal year FY10. Not only this, Mr. Ahluwalia is also of the opinion that there is still a lot of room to ease monetary policy, referring to the 5% repo rate at a time when central banks across the world have brought interest rates down to near zero percent. While Mr. Ahluwalia may indeed have a point, it should be noted that inflation at the consumer level in India still stands in the region of 10% and hence, easing monetary policy further might run the risk of stoking inflation further. This is perhaps the reason the RBI is measured in its approach of reducing the interest rates.

    HDFC lowers rates
    Whether RBI does it or not, HDFC has indeed taken the bait. Of lowering interest rates that is. India's largest housing finance company has lowered its retail prime lending rate by 50 basis points (0.5%) as it decides to pass on the benefits of lower cost of funds to home loan borrowers. As per a daily, the current reduction will shave off Rs 34 if equated monthly instalment (EMI) for every Rs 1 lakh borrowed for a 20-year period. It should be noted that this is the second rate cut announced by the housing finance company in the past three months and it is hoping that the rate cut along with fall in property prices might once again revive demand. However, borrowers looking for property rates to fall further might be in for some nasty surprise as the company's MD has stated in no uncertain terms that property prices have fallen enough and any further reduction will be difficult to come by.



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