Hands tied over economy: Pranab Mukherjee

India has little ammunition left to combat an economic slow down, finance minister Pranab Mukherjee has admitted.

Responding to last week's poor growth figures, Mukherjee said the government could not repeat the huge stimulus programme launched in the wake of the financial crisis because public finances were at breaking point. However, he suggested that interest rates could be cut to ease the pressure on borrowers.

"The second round of global uncertainty and the slow down has come rather quickly on the heels of the previous one, with practically no headroom for running a pro-active fiscal policy," he said.

Alarming GDP figures last Thursday showed the Indian economy grew 5.3% in the three months to March, the slowest quarterly figure in nine years. According to the International Monetary Fund, growth has averaged 6% since 1994. It has forecast an expansion of 6.9% this year.

India is under pressure to rein in spending after its budget deficit widened to 5.75% of GDP in the financial year to March. The government has set a goal of reducing the deficit to 5.1% this year, but economists claimed that the target was optimistic as it was based on growth of 7.6%.

Although there is little room for a fiscal stimulus, Mukherjee said the rapid fall in oil prices could allow the central bank to cut interest rates as inflation declines.

The deputy governor of the Reserve Bank of India, Subir Gokarn, also hinted at the possibility of a rate cut on June 18. He said slower growth "may have a positive, moderating impact on core inflation". In April, the bank lowered interest rates for the first time in three years, cutting by half a percentage point to 8%.