If dealing with the monster of inflation was the top priority until a fortnight ago, it is the financial crisis and the consequent liquidity crunch which has taken the top slot today. In both the situations the government, in association with the RBI and the SEBI, has been firm and proactive.

Until a fortnight ago the government was looking at possible measures to reduce the money supply and accordingly increased both the cash reserve ration (CRR)- the portion of money banks have to keep with the reserve Bank and the Repo rate – the key lending rate of the RBI. This was done repeatedly and in phases for several months. A slew of other measures aimed at increasing the supply of goods, succeeded in curbing inflation. Today the global economic crisis and the liquidity crunch has reversed the position and the strategy now is to increase the money supply and make loans less expensive. In this role too the government and the RBI are equally aggressive so that public confidence in the economy is maintained.

In its latest move on expected lines, the RBI has reduced the Repo rate by 1 percent bringing it down to 8 percent. The CRR was reduced three times by 2.5 percent during the last fortnight. The cumulative effect of both the measures is bound to increase the money supply in the system and keep the economy ticking. Already 1,65,000 crores have been pumped into the system so far. It is bound to boost confidence in the economy and thereby benefit both the borrowers and the investors.

The challenge before the government now is to provide enough liquidity to the economy but at the same time ensure that it does not increase the inflation rate which is still in double digits, though it has been showing a downward trend. The latest figures available show that it slipped to 11.44 percent which is still high. Shri C Rangarajan, a former advisor to the Prime Minister Dr. Manmohan Singh, is of the view that this rate will come down to 10 percent by December.

Fortunately, the fundamentals of the Indian economy are sound enough to meet the challenge. The GDP growth in the first quarter of the current financial year has been 7.9 percent. The IMF too has predicted this growth rate for India for the entire financial year though, according to some estimates, it may come down to around 7.5 percent in the current financial year due to the ripple effects of the global liquidity crunch. Some of the worst estimates however have put it around 7 percent but nothing less. Exports in dollar terms increased by 35 percent in the first five months of the current financial year. Foreign Direct investment in this period was $14.8 billion.

Gross tax revenues are being collected as per the target. The monsoon this year has been normal. The Kharif crop, particularly rice and cotton, has been good. The prospects of the Rabi crop are also bright. Prices of crude oil and many other commodities have come down sharply which is going to be beneficial in controlling inflation.

As the Prime Minister Dr. Manmohan Singh said in the Lok Sabha the other day, financial crisis and the economic slowdown in the developed countries is likely to have only an indirect impact on the Indian economy. Despite this he said “we must be prepared for a temporary slow down in the Indian economy.” Since it is very difficult to predict the precise impact of the depth and duration of the global slowdown, to that extent it’s effect on the Indian economy remains uncertain.

The Finance Minister Shri P. Chidambaram too has assured the Indian people that contrary to what happened in the US and Europe, there is no fear of failure of any bank in India and that “there deposits in Banks are entirely safe.” The reason is that Indian banking system is not directly exposed to the sub prime mortgage assets. Shri Chidambaram asserted that “our banks, both in the public sector and the private sector are firmly sound, well capitalised and well regulated.” The assurance should go a long way to infuse confidence among the people on the country’s economy. It should also spur consumption and alleviate pressures as well as maintain stability in the economy.

In contrast to 1997, most Asian economies are in a better position today to weather the storm. It is the US and the European countries which are facing the brunt. The IMF has already warned that it expects the US to achieve only 0.5 percent growth this year and just 0.6 percent in 2009.

What has come in for severe criticism is the inadequate role of IMF and the World Bank in dealing with the crisis. Several countries including India have criticised the international bodies for not taking swift and timely action expected of them. They expressed disappointment with the system devised 64 years ago resulting in the famous Bretton Woods agreement , which has proved ill equipped to deal with the complex practices of the, 21st century banking that led to the current global financial crisis. The world leaders have to sit again to consider how to prevent excessive risk taking by banks which led to the sub-prime mortgage crisis and in turn the credit crunch.

Note:

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