'Govt spending should stimulate local demand'

NEW DELHI: Rajya Sabha member and former Reserve Bank of India (RBI) governor C Rangarajan told Parliamentarians on Thursday that it was not just enough to spend more to stimulate the economy, but the government should also ensure that the extra spending was on sectors capable of replacing the declining global demand for Indian goods.

While addressing law makers on the impact of the global financial crisis at a talk organised by the Lok Sabha Secretariat here, the former central bank governor said the priority now is to stimulate sectors such as textiles and auto components that would improve local demand.

���We cannot replace international demand for diamonds with domestic demand,��� said Mr Rangarajan. Jems and jewellery was one of the sectors affected by the decline in global demand.

He further said that the government should attempt to reduce the swelling fiscal deficit in line with the economic cycle. ���During a recession, fiscal deficit can be high to stimulate the economy, but it should be brought down when the economy recovers from the growth slowdown,��� said Mr Rangarajan.

He also forecast a 6.5%-6.7% economic growth this fiscal, which would go up to 7%-8% growth next fiscal. But returning to the 9% growth of yesteryears would require the global economy to recover from the grip of recession. ���Until then, by stimulating domestic demand, we can grow at 7%-8%,��� said Mr Rangarajan.

He also said that while the country needed financial innovation to deliver the products that customers need, the country cannot afford to have runaway financial innovation, which can only do more harm than good. Mr Rangarajan also said that derivatives which do not reveal where the risk lies, is a threat to financial stability.

To a question on the continued rise in the prices of essential commodities, Mr Rangarajan said that the higher procurement price posed a conflict of interest for the government in this context. ���If the procurement price is increased year after year to protect the producer, it is not surprising that prices rise,��� he said.

Protecting the interests of the producers of commodities and protecting the interests of the consumers at the same time involves a conflict of interest. One way of addressing the price rise is to increase the supply of commodities, by way of imports and to make public distribution more efficient, he said.