i Develop Stocks Advisory

Shock to economic growth In a recent FII conference held in Mumbai one of the economists Dr Ajay Shah has expressed his views on India’s monetary and fiscal framework. “The key take-away from Dr Ajay Shah's luncheon presentation was that while India does not have the characteristics of a typical emerging market, it is not equipped to cope with shocks to economic growth due to the lack of an appropriate monetary and fiscal stabilisation framework. The reason is that in the past, India was prone to shocks driven by monsoon failure rather than business cycle dynamics, as investments largely comprised of public spending which was relatively stable. With over half of the gross capital formation coming from the private sector, the business cycle is more relevant to growth today. The key reasons why Dr Shah believes that India's monetary policy is illequipped to deal with shocks are: (1) a de facto pegged exchange rate regime, which coupled with an open capital account, precludes monetary policy autonomy; and (2) an effective monetary policy transmission mechanism. On the fiscal front, given the current level of deficits, India does not have the leeway for a large scale stimulus. As a result, even though GDP growth has risen to 9.6% in four years from 3.8% in 2002-03, given the lack of a stabilisation framework, a shock could negatively impact growth just as fast and lead to high growth volatility.”