India to embark on stimulus withdrawal

Thu, 11 Feb Pre-Open

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It has been proved beyond doubt. India has managed to escape one of the worst financial crises in modern times. There are signs of growth revival everywhere. India is expected to close the fiscal year 2010 with a respectable growth of upwards of 7%. However, this has not come without any cost to the economy. A good part of the growth could be attributed to fiscal stimulus undertaken by the government. And this meant enduring a greater than usual fiscal deficit. 6.8% of GDP to be precise. It should be noted that this is far higher than the 2.5% envisaged in the fiscal responsibility and budget management Act. Hence, it is only obvious that Government would aim to bring the deficit down to more manageable levels. There are talks doing the rounds that the Finance Minister would hike the excise duty by 2% during the forthcoming budget. While this would still be lower than 16% that prevailed before the crisis, it will nevertheless give the government decent headroom to grow revenues and at the same time, not have too much of an impact on demand as most companies would be able to absorb most of this stimuli and not fully pass it on to consumers. However, it remains to be seen whether the government will hike duties across sectors or be selective in its approach.

Government would recover every penny, says Paulson
Henry Paulson and Warren Buffett. It is not often that you see these two titans of the US financial industry come face to face at a public gathering. However, an industry body in Buffett's hometown Omaha pulled off this rare coup of sorts. It gave Warren Buffett the chance to interview Paulson. Paulson, as we all know was the US Treasury Secretary during one of the worst financial crises in history. Thus, who better than Paulson to give us the most intimate account of the crisis and what really transpired inside the corridors of power. Obviously, the talk veered towards the bail out of banks. Paulson had no hesitation in saying that the US Government will regain every penny given to the nation's banks during the economic meltdown. Infact, Paulson even predicted a sizeable profit for the government from the deal. What is more, even Warren Buffett seemed to agree.

How can our views be any different from that of these two learned men? However, what matters here is the frame of reference. The cost that they seem to be taking into account is just the purchase price. But what about the damage these acts could cause in the future? By endorsing the theory of too big to fail, Paulson has continued to support a wrong notion. And until this notion that the government would continue to save banks that pose systemic risks continues to rule the roost, no amount of profit on bank bailout would be enough to justify the cost.