When the Asian Financial crisis hit the region in nineties, India was among the very few countries that escaped its wrath. There was not even a remote fallout. But unfortunately, that is not the case this time. Though the global financial meltdown has no direct effect on our economy, it can not remain insulated from the crisis. In fact, the financial earthquake has left hardly any country without giving it a jolt.

The positive aspect, however, is that nations across the globe have united to work jointly to meet the catastrophe which the US President elect describes as “a challenge of a lifetime”.

As far as India is concerned, a good number of economists are confident that we will be able to weather the storm. 

The World Bank President Robert Zoellick is of the view that India may not witness the financial turmoil though it will witness some slow down in its economic growth. This is inline with the assessment of the Indian Government which believes that we have enough instruments to ensure the stability of the Indian financial system. The Finance Minister Shri P. Chidambaram has been putting it across very forcefully that the fundamentals of Indian economy are sound and that it’s banking system, both public sector and the private sector, is “well capitalized, financially strong and well regulated”.

The Reserve Bank’s survey of professional forecasters have also predicted on the same lines though they have revised down the growth rate to 7.7 percent.

That slow down is already visible. The Prime Ministers Economic Advisory Council has now pegged it at around 7 percent for the current fiscal, against 9 percent last year. But even at that rate India will still be recording the second highest growth rate in the world.

Some words from the Microsoft Chief, Bill Gates that the current recession will not be a long term one are comforting but it is difficult to predict how long it will stay. 

There is hardly any room for complacency. At his recent meeting with the top Industrialists of the country the Prime Minister Dr. Manmohan Singh warned that the effects could be “severe and prolonged”. The country would thus need some unpalatable measures before things get any worse. Though inflation continues to be a high priority area, the dilemma between inflation versus growth is less acute now than it was some months ago. Not that growth concerns can override inflationary concerns in the long run but as a matter of strategy in the short run priorities have to be revisited at intervals. In the new situation, however, the focus is to sustain the growth momentum.

That calls for continued increase in the liquidity in the system to boost domestic demand. Understandably, the RBI, in conjunction with the government, has been much more proactive in this regard. It reduced, in a phased manner, the CRR from 9% to 5.5 percent, the repo rate from 9 percent to 7.5 percent and the SLR by 1 percent to 24 percent, all in a matter of  one  month. The latest drop  in  rates  led  to pumping  of  the much  needed  an  additional

Rs. 1, 85, 000 crores into the system.

That there has been a negligible increase in the weekly inflation rate after a consistent fall for five weeks is primarily because of the increase in some food articles which is a temporary phase. The inflation rate is set to touch the single digit mark by the end of the financial year.

What however is of concern is the fall in industrial production index which fell to 1.3 percent in August. Many key sectors like real estate, construction, IT, steel, aviation, and auto industry have been hard hid. Here too the government has come out with a number of timely measures to give relief to these sectors. Despite this, it is being apprehended that the slow down in industrial sector may continue for some time. While the fall in overall growth figures in this sector between September 2007 and September 2008 is not alarming - from 6% to 5 % but the fall is steeper if one compares the April - September period of 2007 and 2008.

Similarly, it is only natural that in the current international turmoil leading to substantial fall in demand, our export growth in September came down to 10.4 percent compared to 35 percent last year. The trade deficit shot up to 53 percent during this period.  But this is likely to come down in the second half of the financial year due to substantial fall in the international oil prices which have touched around $ 58 a barrel. The fall in rupee value should have helped increase exports but that advantage is mitigated by the fall in international demand due to recessionary influence. Flagging exports and waning demand is forcing companies the world over to cut production. That is why every country is focusing on increasing domestic demand by pumping liquidity into the system. With its huge potential of increasing domestic demand, India is better placed compared to many other countries like China which is an export oriented country and Brazil which is commodity driven.

That Public sector banks have begun the process of reducing lending rates to make loans cheaper, is a step in this direction. It is high time that Private sector banks too follow suit, heeding the advice given by the Finance Minister at his recent meeting with the Chiefs of these banks. They have to realize that the present extraordinary financial situation demands an extraordinary response and concerted efforts by all. Profitability can not be the only motive to guide them in the short run.

Investing in social infrastructure like health and education is the right course to follow in this situation. That the government proposes to open 600 new schools at the block level is therefore a step in the right direction.

At the same time India will seek reforms in the international financial institutions and improved regulation and supervision to prevent recurrence of such situations. But for now the challenge is to overcome the present tide and prepare ourselves for dips and dives in the future.  For that, we need a multi- pronged approach and that is precisely what is being done.

Note:

• 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.