India's inflation rate will fall further and with the global slowdown likely to spill into the next financial year, there may be a need for more fiscal stimulus, a senior government official said on Friday. India's wholesale price index, its most widely watched inflation measure, eased below 7 percent in early December to its lowest in nine months and financial markets now expect this could prompt the central bank to cut interest rates.
"I have said it (inflation) is going to come down. It may come down even further," Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, told reporters. On Thursday, the government sought parliament's approval for spending an extra 424.8 billion rupees ($9 billion) as part of a booster for economic growth, which has been slowing as a result of high interest rates and the global financial crisis.
"It is my view that fiscal stimulus will not end in the current fiscal year," Ahluwalia said. "Since the global slowdown is not just this year but also next year, the fiscal stance that we adopt needs to be considered not just for this year but also next year."
He said it was necessary to give the economy the stimulus it needed. "This will mean the fiscal deficit will be higher (this fiscal year) and I think the government will report this to parliament at the right time," he said.
The economy grew an annual 7.6 percent in the September quarter and analysts expect the pace to moderate to 7 percent for the entire 2008/09 fiscal year from 9 percent last year. The central bank has cut its main lending rate by 250 basis points to 6.5 percent since mid-October and reduced banks' cash reserve requirements to try to unfreeze India's credit markets.
Economists say the combined federal and state fiscal deficit is likely to top 7 percent in the year to end-March, while the federal deficit will probably exceed the government's goal of 2.5 percent of gross domestic product.