|Type:||Papers and Briefs|
|Series:||South Asia Working Papers|
In South Asia, India and Sri Lanka were affected most by the global economic crisis. They initially responded to the supply shock by a combination of fiscal and monetary policies to mitigate the impact and support economic growth. Bangladesh and Sri Lanka took narrower targeted fiscal stimulus measures, but India adopted more across-the-board fiscal stimulus to support economic growth. The differences in the fiscal and monetary policy stance reflect the impact of the crisis, the assessment of the downturn, and the availability of fiscal space.
Fiscal measures are in general well-targeted, but some measures did not have specific expenditure ceilings or timeframes, raising concern about their temporary nature. Two key challenges are to ensure timely removal of fiscal stimulus, and to resume appropriate fiscal consolidation measures and support for structural reforms, for strong supply side responses in the recovery phase and for a more competitive South Asia.
Monetary policy successfully stabilized the financial sector from the initial impact of the global crisis. But the effectiveness of monetary policy to support growth by lowering the cost of borrowing was mixed. Given the inflation risks arising out of recent global oil price movements and potentially weak domestic food production in South Asia, exit strategies from the accommodative monetary policy should be carefully considered while balancing fiscal accommodation to avoid jeopardizing preliminary signs of economic recovery.