India's quiet support of QE2 shouldn't surprise

Thu Nov 11, 2010 4:51pm IST

An employee of an money exchange counts U.S. dollar bills in Tokyo November 27, 2009.  REUTERS/Yuriko Nakao/Files

An employee of an money exchange counts U.S. dollar bills in Tokyo November 27, 2009.

Credit: Reuters/Yuriko Nakao/Files

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-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Martin Hutchinson

WASHINGTON (Reuters Breakingviews) - India and the United States aren't just the biggest democracies in the world. They're also monetary kissing cousins. So it was no surprise to see India's prime minister offering qualified support for the Federal Reserve's attempt at monetary stimulus.

India has a large budget deficit, negative real interest rates and an ongoing payments deficit. Like the United States, India wants cheap global money to keep its party going.

While China, Brazil and other emerging markets have sharply criticized the Fed's additional $600 billion quantitative easing, Premier Manmohan Singh was quietly supportive, saying: "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."

That reflects the fact that India has benefited greatly from the current flood of global liquidity and needs it to continue. While growth in consumer prices is troublingly high and its domestic interest rates are well below inflation, its domestic money market is tight, even with 15 percent growth in M3 money supply in the year to October. Bank borrowings from the central bank hit a record 1.2 trillion rupees ($27 billion) Oct. 29.

The local money market's heat derives from the country's 8.5 percent GDP growth and its high government borrowing.

Government receipts recently benefited from $23 billion of 3G cellphone spectrum sales, but the central government deficit is expected to be 5.5 percent of GDP in the year to March, with additional substantial state deficits.

Overall government debt is officially estimated at 73 percent of GDP, nearly all domestic, although foreign inflows to purchase domestic debt are currently being encouraged.

Since India runs a continuing payments deficit, the rupee has not been particularly strong, rising only 6 percent against the weak dollar in the past year. High international liquidity encourages fund flows into the market, providing necessary capital for business growth and helping finance the national and state budget deficits.

Moderate inflation seems a cheap price to pay for rapid growth and increasing prosperity, while the principal threat to India's recovery remains as always a liquidity crisis, either domestic or international.

Loose fiscal and monetary policies may eventually produce difficult economic times in India -- as in the United States -- but meanwhile the good times roll on.

CONTEXT NEWS

-- Indian Prime Minister Manmohan Singh gave moderate support to the U.S. quantitative easing policy in Delhi on Nov. 8, saying: "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."

-- India's fiscal deficit for the six months to September 2010 was 1.33 trillion rupees ($29.9 billion), but this included $23 billion of 3G mobile phone license sale revenue. Its target deficit for the fiscal year to March is 3.81 trillion rupees, 5.5 percent of GDP.

-- India's banks faced their worst cash crunch in three years in October and lenders borrowed 1.2 trillion rupees from the central bank on Oct. 29, an all-time high. M3 money supply grew 15.2 percent in the year to Oct. 8.

-- India's consolidated government debt was 73 percent of GDP in March 2010, of which 50 percent of GDP represented obligations of the central government. Singh raised the overall limit for foreign holdings of government debt from $20 billion to $30 billion on Sept. 23. Ten-year Indian government debt currently yields 8.3 percent, while the central bank's short term reference rate is 6.8 percent.

-- India's GDP is expected by the Economist panel to grow 8.6 percent in 2010, with inflation of 11.7 percent. Its current account deficit is expected to be 1.5 percent of GDP; the rupee has risen by 6 percent against the dollar in the past year.

(Editing by Rob Cox and Martin Langfield)

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