Tuesday, October 6, 2009

Recovery and Government Debt

The US Federal Reserve has said economic activity is picking up but it expects to keep interest rates close to zero for an extended time. US interest rates were cut to the current level of between 0% and 0.25% in December last year, and have been left unchanged. The 0.7% fall in second-quarter US GDP was better than market expectations and an improvement from the first quarter's 6.4% contraction; importantly, business investment which had slumped 39.2% in the first quarter, fell at a 9.6% rate in the second quarter. Conditions in financial markets have improved further, and activity in the housing sector has increased, though household spending remains constrained by ongoing job losses. The Fed also pledged to continue a program with $1.45 trillion to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and debt. Meanwhile, US jobless rate hit 26-year high of 9.8%, underscoring the fragility of the economy's recovery from its worst recession in 70 years as businesses remain cautious about the future. The IMF said it now expects the US economy to grow 1.5% in 2010, up from its July forecast for 0.8% growth, however, it warned that the financial crisis had contributed to a high and rising debt trajectory that could become unsustainable without significant medium-term measures. The IMF estimated that US debt would reach almost 110% of gross domestic product by 2014, and called it a worrisome deterioration given looming healthcare and pension pressures. The US budget deficit topped $1 trillion for the first nine months of the fiscal year that began in October and totalled $1.1 trillion, as individual and corporate tax receipts are sliding because the jobless rate continues to rise and companies have yet to see a sustained increase in demand; the shortfall is also widening as the government ramps up spending. For the fiscal year that ends in September, the Office of Management and Budget has forecast the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

The Reserve Bank of India feels that choices with regards to policy changes like revision of monetary policy are becoming increasingly complex for India's central bank as signs of economic recovery continue to be tentative while inflation is firming up. Several indicators are pointing to an economic recovery, such as better-than-expected economic growth numbers, improvement in industrial output during April-July and higher relative growth in infrastructure industry or core sector performance, revival of capital flows and strong recovery of the stock markets. Indeed, the bellwether Sensex broke the 17,000-mark this week — a level first reached two years ago in September 2007 and last seen 16 months ago in May last year — on sustained capital inflows. Yet, there are downside risks on account of the impact of poor monsoons on agriculture, slowdown in exports and sluggishness of global recovery. On the other hand, rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance; WPI-based inflation for mid-September rose to 0.83% from 0.37% in the previous week on costlier food items.

The country’s fiscal deficit—the gap between receipts and spending that is usually financed through borrowings—rose 35% in the first five months of the fiscal compared to the same period a year ago as the government continued with tax cuts and higher public spending to boost the economy. Fiscal deficit in the April-September period stood at Rs 1,82,290 crore, which is 45.5% of the budget estimate for the current fiscal. In the same period a year ago, it had scaled 87% of the budget estimate and the government had to revise the annual fiscal deficit from a target of 2.5% to 6% as the economic downturn prompted it to step up spending and cut taxes. The government had set an annual gross borrowing target of Rs.4.51 trillion for 2009-10 (April-March), and has already sold Rs 2.95 trillion of bonds until September; it will sell bonds totalling Rs.1.23 trillion ($25.6 billion) between October and March as part of its borrowing schedule. Expenditure curbs are being put in place so that the fiscal deficit target of 6.8% of GDP would not be exceeded. For the first time, RBI is offering more flexibility to state governments to rein in their market borrowing costs and has allowed West Bengal to borrow funds by selling state government securities with a put option after four years, which means investors can redeem these securities prematurely after completion of the fourth year of maturity; states, typically, borrow from the market by selling 10-year securities called State Development Loans (SDLs) through RBI s auction window.

1 comment:

kavithaponmalar said...

Which economy is in best condition in the world?

A) American

B) Asian

C) European

D) Africaan

E) Middle east