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India’s next administration needs to cut interest rates and unveil more stimulus packages to revive an economy growing at its slowest pace in six years, the prime minister’s top economic adviser said.

“The stance of policy will have to remain concerned with trying to counter the slowdown in the next year,” Montek Singh Ahluwalia, deputy head of India’s planning commission, told Bloomberg News in an interview in New Delhi. “The monetary and fiscal policy action will continue.”

Ahluwalia, 65, unveiled a plan on Jan. 2 to inject capital into banks and finance firms and allow overseas investors to double purchases of debt in the government’s second stimulus package in a month. On the same day, the central bank cut interest rates for the fourth time in less than three months.

The measures are intended to steer Asia’s third-largest economy through the “worst quarter” of the global slump as exports continue to fall and industrial output extends its first contraction in 15 years, Ahluwalia said. The world’s biggest democracy holds nationwide elections in April and May that may stymie policymaking at a time the world recession is deepening.

“The meltdown is so enormous that no matter what you do, it would be difficult to insulate the economy from slowdown,” said D.H Pai Panandiker, president of RPG Foundation, an economic policy group in New Delhi. Prime Minister “Manmohan Singh’s Congress Party is faced with its worst crisis as no party would like to go to elections with people losing jobs and companies shutting down plants.”

Cutting Jobs

Exporters in India have cut about 65,500 jobs as recessions in the U.S. and Europe, the nation’s biggest markets, damp overseas demand. Industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 9.9 percent in November after falling for the first time in seven years the previous month. Output at factories and utilities also contracted in December, according to ABN Amro Bank NV.

India isn’t alone in Asia in preparing more measures to revive growth. Singapore will bring its budget forward to January from February and China may announce a second round of policies as early as this month. South Korean and Malaysian leaders last week said they will take more steps to spur expansion if necessary.

“The first quarter of the year is conceivably going to be the worst,” Ahluwalia, who worked as an economist with the World Bank, said on Jan. 2.

Revive Lending

To revive lending and boost consumer demand at home, Reserve Bank of India Governor Duvvuri Subbarao has enacted the steepest-ever cuts in interest rates.

Subbarao has slashed the overnight lending rate by 3.5 percentage points and the borrowing rate by 2 percentage points since Oct. 20, helped by the decline in inflation to a 10-month low. The Reserve Bank also reduced the proportion of deposits banks must hold in reserve by 4 percentage points cash advance no faxing.

“The risks are clearly towards even more aggressive cuts as growth continues to falter and inflation declines rapidly,” said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai. “We continue to expect growth to slow to 6.7 percent this fiscal and 5.8 percent in the next fiscal year.”

Inflation is unlikely to be a problem for at least another six to eight months, freeing policy makers up to revive the economy, Ahluwalia said. Growth in the $1.2 trillion economy is expected to slow to 7 percent in the year ending March 31 from 9 percent or more in the previous three years.

Fiscal Stimulus

“A lot will depend upon the fiscal stimulus in the next budget,” said Ahluwalia, who joined Singh’s economic team from the International Monetary Fund in 2004. “If there is no fiscal stimulus, obviously growth will be lower.”

The Jan. 2 policies spurred a rally in India’s 10-year bonds, pushing yields to record low today.

The yield on the 8.24 percent note due April 2018 fell 14 basis points to 4.93 percent before trading at 5 percent. The Sensitive Index had gained on the first two days of 2009 in anticipation of more measures, reversing a record annual slump.

Overseas stock market investors turned buyers on the first day of the year, reversing a record outflow of funds that sent the rupee to an all-time low. Last year’s sell-off underscored India’s increasing vulnerability to global crises.

The benchmark stock index rose 1.5 percent today and the rupee gained as much as 1.6 percent on expectations the stimulus measures will encourage overseas investors to boost holdings of local assets.

Financial Crisis

Trade represented 35 percent of India’s gross domestic product in the year to March 31, up from 21 percent in 1997-98, the year of the Asian financial crisis, according to the central bank. Investment accounted for a third of growth last quarter.

The credit crunch has also delayed financing for India’s $500 billion spending plan on roads, ports and other infrastructure, though India’s comparatively higher economic growth rates should lure investors back, Ahluwalia said.

The Singh government’s first stimulus package on Dec. 7 earmarked 200 billion rupees ($4 billion), or 0.3 percent of GDP, for infrastructure spending.

“It does look like growth in Asia will be 5 percent higher as compared with the U.S. and Europe,” said Oxford-educated Ahluwalia. “Unless the world remains completely crazy, it should be possible to finance investments of that order in one of the faster growing parts of the world.”

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