India on Saturday cautioned G-20 nations against rushing to withdraw stimulus measures, although many countries were seeing the worrying trend of expenditure far outstripping income.
Finance Minister Pranab Mukherjee, who initiated gradual roll back of stimulus measures back home in the Budget for 2010-11, said that withdrawal of fiscal and monetary props, all at the same time, could derail the fragile economic recovery.
"The market is sending strong signals that the fiscal situation is a matter of concern...we should all not rush to fiscal (stimuli) exit at the same time so as not to undermine the recovery...," he said at the G-20 Finance Ministers meet Busan.
India had unveiled a number of fiscal and monetary sops to insulate the domestic industry in the wake of the 2008 global financial crisis, but rolled back some of them such as excise duty cuts after the economy posted healthy growth.
The economy expanded by 7.4 per cent in 2009-10 from 6.7 per cent in 2008-09, the year that bore the brunt of the global crisis. India's fiscal deficit is pegged at a high 5.5 per cent of GDP this fiscal, but the government hopes to reduce it to 4.5 per cent in 2011-12 and 4.1 per cent in 2012-13.
High fiscal deficit makes borrowings costlier for the industry and in turn impact their investments -- key to economic growth -- at a time when public spending itself is strained because of poor government finances.
"Those countries that have market compulsions may need start the consolidation now. Others can stagger in fiscal consolidation. It is critical, however, to clearly lay down credible and transparent fiscal consolidation paths," Mukherjee said at the meeting called to discuss the global financial crisis and ways to regulate financial institutions.
The Reserve Bank of India too has signalled exit from monetary stimulus and has raised key policy rates twice this year to put the lid on inflation.
Mukherjee also warned the countries that they should exit from stimulus before the markets started forcing them on account of deterioration in fiscal conditions.
"And, we need to act before the market forces us to do so. I may point out that fiscal deterioration is a natural corollary of deep and protracted recessions and downturns as governments try to stimulate the economy back to their true potential," he said.
This entails ceding some control to markets that have to fund the high deficits. Fiscal consolidation is a natural corollary of the recovery process, as countries can only grow their way out of high levels of public debt, he said.