The Central government will keep unwinding economic stimulus deployed during the financial crisis and continue raising interest rates despite uncertainty linked to eurozone’s debt woes, Finance Minister Pranab Mukherjee said on the sidelines of a meeting of Group of 20 finance ministers and central bankers on Friday.
He also said that the Indian government does not favour taxing banks to create a corpus for future bailouts and stressed the importance of well-placed regulations to detect and contain any deviation in financial institutions’ functioning. “The Indian banking system could withstand the trouble, mainly because of well-placed regulations.”
The finance minister said that a deepening debt crisis in Europe could hit India’s and other emerging economies' exports and growth, but such a risk was not stopping India from gradually reversing loose fiscal and monetary policies.
Asked whether uncertainty about the impact of Europe’s crisis on the global economy was a reason to hold off with further rate increases despite last quarter's buoyant growth, he said: “No, we won't pause them.”
The Reserve Bank of India raised rates in March and April by 25 basis points (100 basis points is 1 percentage point).
The finance minister, however, said that Asia’s third-largest economy would continue to consolidate its finances and underscored the contrast between the relative fiscal health of emerging economies and eurozone members. “You need fiscal prudence and in the developing countries, we are doing so.”
He also said that the government planned to withdraw stimulus next year. “I hope to have next year a total exit policy.”
“If Europe and the entire eurozone is affected by this crisis and the recovery process is slowed down, naturally it will affect both exports from developing countries ... and foreign direct investment inflow. We hope the crisis will be resolved sooner.”