India has taken an array of monetary and fiscal measures, in quick succession, to contain inflationary pressures - with the annual rate already moderating from around 13 per cent in August to 10.72 per cent by the end of October - and, more importantly, to make available adequate domestic resources to maintain growth in the face of an unprecedented international financial crisis and global economy drifting into recession.

The Reserve Bank had, within four weeks in October, lowered reserve ratios and reduced a key interest rate to provide some 250,000 crores of liquidity for banks to finance businesses and consumers. These measures, welcomed by the industry and other productive sectors, have helped to impart a sense of confidence about India‘s ability to weather the global storm.

Growth Momentum
Prime Minister Dr Manmohan Singh remains focussed on seeing that the Indian economy does not get unduly affected by the adverse developments abroad. He has appealed to the industry and the country in general to turn the crisis in the world economy into an opportunity to ensure that India comes out of the global crisis with its fundamentals unimpaired, protecting employment.

What gives confidence and strength to the Indian economy is its sound financial sector with its well-regulated and well-capitalised banking system, the sustained growth in deposit accretion and credit flows, and assured safety for depositors, the global competitiveness of its manufacturing and services, high savings and investment rates and a comfortable level of foreign exchange reserves which could be drawn to make up for any shortfalls in capital inflows.

The Finance Minister Shri  P Chidambaram has urged banks to lower interest rates, in the light of the steps taken by RBI both on liquidity and interest rate, and several public sector banks have already announced plans on reducing their prime lending rates. Banks have been asked to increase credit for productive purposes and ensure credit quality. RBI has also suggested to banks to restructure the dues of small and medium enterprises on merits.

There is general expectation that inflation would continue to moderate - especially now that global prices of oil (though still volatile) and commodities have sharply declined from their high levels in the first half of 2008 -  and RBI projects that the annual rate of inflation would be down to 7 per cent by March 2009. India can well maintain growth at not less than 7 to 7.5 per cent, as the Prime Minister pointed out,  despite some adverse impact on trade and capital flows which all countries have begun to experience in these uncertain times. Even at 7.5 per cent, India will remain the second fastest growing economy.

Given the unsettled conditions in global markets, the Prime Minister has set up an high-powered group chaired by him to closely monitor the evolving macro-economic situation so that growth momentum is sustained at reasonable rates. A committee of senior officials would keep a day-to-day track of trends.

Monetary & fiscal measures
The Reserve Bank of India had vigorously moved in October to bring down the cash reserve ratio from a peak of 9 per cent to 5.5 per cent, reduce the key policy interest rate (repo) from 9 to 7.5 per cent and also the statutory liquidity ratio by one percentage point to 24 per cent of their net demand and time liabilities. These were all designed to inject massive doses of liquidity to the banking system which in any case has been recording a higher credit growth in the current year.  Nevertheless, when there was some liquidity constraint experienced by money markets and the foreign exchange market also coming under demand pressures, RBI had to intervene with remedial measures.

As part of measures to minimise the adverse impact of global crisis on domestic economy, the Finance Minister has reduced certain duties to give relief to some of the affected sectors like steel and aviation. On the budgetary side, higher allocations for social sectors and rural employment and other flagship programmes should generate consumption which contributes to economy’s growth. Most corporates including in the I T sector and banks have managed to maintain profitability, though somewhat lower than expected, in the second quarter (July-September), and the recent government measures on liquidity and interest rates should help to sustain business confidence.

Monetary policy has moved away from continued tightening, in the days of inflation climbing during 2008, to a significant easing of curbs with the steady moderation in the annual rate of inflation  after peaking at 12.65 per cent in August. It had since been coming down over recent weeks and stood at 10.72  per cent in the week ended October 25. While the fall in inflation rate has been facilitated by the sharp drop in global prices of oil, food and other commodities as well as domestic supply management, the oil market remains volatile. Taking crop prospects and other domestic factors into account, RBI continues its monetary policy stance of maintaining growth with price stability as well as orderly conditions in financial markets.

Macro-economic management
India has to summon all its abilities at macro-economic management because of the extraordinary global situation in which there is weakening of global demand and likely interruption in external capital flows. So far, there have been only ripple effects on the economy and exports in the first half of the fiscal year (April-September) have recorded a robust 35 per cent growth. But oil imports at higher prices have pushed up the import bill and trade deficit is widening. There was some ‘knock-on’ on financial markets but there is no longer any sign of liquidity tightening with the measures taken.

Many developing and leading emerging economies including China and Korea have come under strain and some of the poorer countries face risks of  economic disruption because of fiscal and balance of payments difficulties. China’s growth, largely export-led hitherto, has also slowed down and it is reorienting its policies to promote greater domestic consumption with the weakening of external demand especially from USA and Europe due to recessionary conditions there. India’s exports can be maintained without loss of momentum in the latter half of the year with greater focus on products and growth markets, especially with the exchange rate which has depreciated in relation to the dollar.

While there has been an outflow of foreign portfolio investments of the order of 10 billion dollars, India continues to attract foreign direct investment which totalled an impressive 17.66 billion dollars in the first six months, April to September, compared to 7.25 billion in the corresponding period of last year. There has been some draw down on our reserves to meet imports and other payments. With its sound management and continued liberalisation, India continues to be an attractive investment destination, especially if investors have to seek avenues away from the recession-hit developed nations.

(The author is a freelance journalist. The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of SME Times.)