Uncertainties in the global economy are posing serious problems to India's macro-economic indicators. The global economy is witnessing severe debt crisis especially in the United States and some of the European regions. Now the fear of a double dip recession is looming large around the world. The Economic Advisory Council to the Prime Minister of India (PMEAC) has already started forecasting that the government is going to miss the fiscal deficit target of 4.6% of Gross Domestic Products (GDP) for the financial year 2011-12. Recently, Standard Chartered Bank has revised its fiscal deficit forecast for 2011-12 to 5.4% of GDP from 5.1%.
There are many factors behind all these negative forecasts. Due to slowing GDP growth, revenue collections would be affected. There is also a chance that the government may miss its targeted proceeds from disinvestments due to the prevailing weak market sentiments. Subsidies on petroleum products and fertilisers are surging. The recent hikes in petroleum products are also not helping much due to several cuts in excise and custom duties for different petroleum products. There still exists a big misalignment between local fuel prices and global crude oil prices. Welfare spending on employment programmes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme is expected to keep the government's expenditure high. All this may result into a higher fiscal deficit.
Apart from fiscal deficit, Indian economy may also face current account deficit. The weakening global economic conditions may adversely affect the exports of goods and services. This would lead to a higher-than-expected trade deficit.
The problem is, in the face of any slowdown, unlike 2008, this time the government is not left with too many options to take stimulus measures. Inflation is already very high and there is no sign of its softening in the near future. It is expected to moderate only towards the end of the current fiscal year. The only respite for the inflation would be declining commodities prices in the wake of weakening global economy.
There are chances that the capital inflows would also get affected. The foreign investors would leave emerging markets to cover their losses elsewhere. It would become difficult to raise money through domestic bonds due to bleak economic conditions and adverse fiscal positions which would make the bonds less attractive. All this will propel the cost of borrowings for the Indian companies. This in turn would affect growth and profitability.
It is high time for the Government of India and Reserve Bank of India (RBI) to ponder upon on its policies in the wake of rising uncertainties in the global economy. Reserve Bank of India (RBI) has already raised key lending rates 11 times since March 2010 to tame the inflation. Now, the time has come that it should consider a pause. Otherwise this rate increase policy would adversely impact the growth of the Indian economy. At the same time, the government should take the right steps to curb the supply side constraints to ease out inflation.
Definitely, the Government of India and its independent agencies such as RBI do not have any control over the worsening scenario in the global economy. But right measures taken at the right time may lessen the adverse effects of the same.