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The Indian government's exit strategy

Sep 16, 2009

After injecting massive doses of liquidity in the battered financial system, the G-20 nations in a recent summit had taken a stand not to withdraw the stimulus packages unless and until sustainable signs of an economic recovery were visible. While the Indian government also introduced stimulus measures to bolster India's slowing economy, the question remains as to when it will tighten its fiscal policy. A leading business daily has indicated that the RBI may start doing that in the first half of 2010. The Indian economy is in a tricky situation. While the economy had shown signs of revival, deficient monsoon this year have tainted the overall picture.Therefore, while growth in GDP is expected to remain sub-par compared to what was expected earlier, damage to crop production mean that food prices will raise the ugly specter of inflation. Given that economic growth is high on the government's agenda, in the near term atleast, it is not expected to do much in terms of turning off the liquidity tap.

The problem, however, is higher inflation. After all, even though the WPI (broad measure of inflation) is still languishing in the red, the CPI (inflation at consumers' level) has been stubbornly strong. This means that a pickup in inflationary pressures would be a serious concern. Therefore, it is obvious that the Indian government is walking on thin ice and faces considerable uncertainty in terms of withdrawing the stimulus measures just like its peers in the developed world.

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