Award Winning article in IIM Shilong Finance Magazine.

2. Commodity and asset prices have risen aided by high levels of global liquidity

3. Emerging market economies which are generally recovering faster than advanced economies, are likely to face increased inflationary pressures

4. Uncertainty about the pace and shape of the global recovery

5. The surge in oil prices, if global recovery is stronger than expected

6. Sharp increase in capital flows, above the absorptive capacity of the economy, which may complicate exchange rate and monetary management

7. Large fiscal deficits command a bigger risk to both short-term and to medium-term economic prospectsGlobal Scenario<br />Last five year the world has seen a dramatic downside in term of negative growth in their domestic products. All the major economies except China and India have undergone contraction varying from -2.5% (France) to -10.2 % (Brazil) during 2009, as evident from the chart.<br />161925687705<br />1France2Germany3Japan4UK5US6India7China8Brazil9Russia<br /> Chart: GDP Growth rate of major economies in last 5 years<br />The IMF says that, led by China, the world economy is bouncing back strongly from its 2009 decline. US growth is projected to reach 2.7% this year, a nice rebound from last year's 2.5% decline. The IMF, in its latest financial stability report, says there is an urgent need for more regulation of financial institutions. <br />Source: Global Financial Stability Report Oct 2009, IMF<br />This entire fiscal stimulus comes at the price of greatly expanded debt. The Congressional Budget Office this week said the US deficit will for the second straight year exceed $1 trillion, an amount equal to about 10% of GDP. This explosive volume of debt will at some point have to be halted and rolled back. But, says the IMF, not yet. The exit from stimulus towards fiscal balance should come only when there is a tangible pickup in consumption, investment and exports. Unfortunately none of these elements are yet present.<br />Indian Scenario<br />The economy is steadily gaining momentum, though public expenditure continues to play a dominant role, and performance across sectors is uneven, suggesting that recovery is yet to become sufficiently broad-based. The baseline projection for GDP growth for 2009-10 is now raised to 7.5 per cent. <br />284797538100The Industrial Growth in India has been significant with 7.6% growth rate up to 3rd Q and 11.7% in November but the closest indicator of Industrial growth, bank credit has not exhibited a parallel picture. Growth in Bank credit is sluggish at 8.8% for the first 3 Q of year as against 12.5% last year. This can be due to either low demand of funds from industry or the banks are not lending easily.<br />Industrial Growth has been high at 6.3% but according to a recent study of 1752 manufacturing firms, done by RBI, financial performance of these firms has declined by -1.6% while net profit were up by 9.6%.This happened mainly due to sharp cut of 9.3 % in raw material cost. The import of capital goods and raw material usually increases during industrial growth but this is yet not visible and it has been negative for November. The fourth indicator of state of industry is the movement in price. Growths of manufacturing industry prices are still low at 5%.<br />Conclusion<br />There is a need for a prudently planned exit from the fiscal stimulus. A phased rollback of the stimulus is essential to maintain a balance between delivering sustainable growth and stabilizing the economy. A hastily worked out stimulus could end up being disastrous and counter-productive for the industry. There also needs to be greater coordination between fiscal and monetary exits to avoid conflicting results between them. We need to understand that we are not out of the woods yet and that the darkness might prevail for a longer time than anticipated.<br />