Federal Reserve's QE3 will benefit India in the short term: Raghuram Rajan

NEW DELHI: The US Federal Reserve's latest round of monetary stimulus and monetary easing by the European Central Bank will benefit India in the short term, chief economic adviser, Raghuram Rajan, said on Tuesday.

The Fed began buying $40 billion a month in mortgage-backed securities this month and has pledged to continue the purchases until the labour market has improved substantially. The programme is called QE3 because it is the Fed's third try at quantitative easing, or buying bonds to stimulate the economy.

Rajan emphasised the need the reduce fiscal gap by cutting on subsidies. "Economic gloom is not restricted to India," he added.

Finance minister P Chidambaram has got down to the business of keeping the fiscal slippage to the minimum after admitting that meeting 5.1% target for the year will be difficult.

The minister is personally looking at any expenditure above Rs 200 crore to ensure that there's no overspending by any ministry and has tasked the revenue department to look out for more funds to cushion the impact of higher subsidies.

The borrowing calendar, to be announced on Friday, is not likely to suggest any extra borrowing which will send out a clear signal that the government is serious about fiscal consolidation.

The government will likely borrow an additional Rs 50,000 crore ($9.34 billion) for the year ending in March and miss its fiscal deficit target, a Reuters poll showed, raising doubt about the fiscal discipline of a country whose credit ratings are under threat.

The country's fiscal deficit is expected to rise to 5.8 per cent of gross domestic product (GDP), higher than the government's target of 5.1 per cent of GDP given in March, according to the poll of 24 economists taken over the past week.

Estimates for the government's additional borrowing for the second half of the fiscal year which started in April ranged between Rs 15,000 crore to Rs 75,000 crore.

Although major reforms this month, including a hike in subsidised diesel prices, have been cheered by markets, investors remain worried about fiscal discipline.

The government had earlier set its borrowing target for October-March at Rs 2 trillion, as part of its plans to raise Rs 5.7 trillion for the full fiscal year.

However, four months into the year, the deficit has already hit 51.5 per cent of the full year target, making it likely the government will have to resort to more borrowing.

India's GDP forecast has been cut by 1% to 5.5% by Standard & Poor's Ratings as the entire Asia Pacific feels the pressure of ongoing economic uncertainty.

"Although Asia Pacific has recorded strong GDP growth relative to other global economies, we have observed a continued change in the region's economic barometer," said S&P ratings in a statement on Monday.