India: Fiscal retrenchment?
Growth has continued to slacken to under 8% by the second quarter of 2008. Inflation is high, driven by commodity prices, but the peak appears to have passed. The current account deficit has risen substantially and there is downward pressure on the exchange rate. The economy is projected to slow further over the next year and to recover in tandem with the world economy in 2010.
Unchecked fiscal spending during the expansion has left the Indian authorities with little room for manoeuvre in the ongoing slowdown. At the same time, foreign institutions have become more reluctant to invest in India. A period of fiscal retrenchment seems desirable, focused on making government subsidies available only to those in real need.