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| Mood is recession, but India in no crisis | | |
Nitish Sengupta
The vote-on-account presented by finance minister Pranab Mukherjee on Monday was essentially a lame duck Budget presented before a lame duck Lok Sabha. Certain interested quarters created high expectations about the Budget thinking that the government would try to make the most of this exercise on poll eve.
Also, importance was given to the occasion because, in a way, it was Mr Mukherjee’s fourth Budget (although there is a gap of a quarter-of-a-century between his third Budget and this one). But he appears to have played by the rules and did not make any major fiscal change.
In all fairness, it must be admitted that he has done what he could by discussing the measures already taken by the government to deal with the ongoing economic recession. I strongly maintain that there is no economic crisis in India in as much as the fundamentals are still very sound. Our much-abused regulatory system was in place when the Wall Street meltdown occurred in October, and that’s why India’s banking system did not meekly collapse as Wall Street investment banks did.
On account of the much talked about cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the like, it may be impossible for an average bank in India to give loans well in excess of its deposit base, and without having the required security.
Institutions such as ICICI Bank, which are somewhat exposed to international banking systems, had a few hiccups but recovered with timely emergency steps. A visitor from the United States or Britain would be surprised to note that markets and malls in India are still full of shoppers and, despite the crisis the automobile industry is facing, our roads are still crowded with cars.
Also, low-cost airlines are doing roaring business. The latest forecast of India’s GDP growth for 2008-09 is 7.1 per cent, which is higher than the growth rate of any other country. It is only a little less than the projected growth rate of China, which now has the highest growth rate in the world.
But there are some danger signals which require prompt remedial action. India’s ready-made garment export industry was the first to get a recessionary shock. As demand for clothes in the US and other Western countries dropped, many Indian concerns lost business and faced acute recession, leading to axing of jobs. This requires immediate attention.
All necessary help should be given and exporters should be persuaded to explore new markets — in Asia, the Far East and Africa. They should also focus on the domestic consumer who may be induced to adopt Western style garments with a little bit of persuasion and affordable prices.
Secondly, there is a danger that many Indian professionals and technicians working in the US and other Western countries will face retrenchment and may have to return home. They should be provided resettlement and rehabilitation benefits and encouraged to fill in existing gaps in our system. This must be given top priority as so many Indian families have youngsters working in the West.
Thirdly, repatriation of foreign exchange by NRIs has become a major source of India’s foreign exchange earnings in recent years. As people lose their jobs, this lucrative source may dry up leading to the diminution of our foreign exchange reserves.
Fourthly, in the last two decades, companies in the US and other Western countries have been outsourcing their jobs to India to a very large extent. This may come down. Some of the call centres may have to be closed down, leading to significant, if not massive, unemployment in the information technology-related industries.
And finally, some domestic industries, notably automobile and steel, are facing acute recession.
The government should immediately step up investment in infrastructure projects. That will help these sectors fight recession.
It should be emphasised that stimulating domestic demand is most important in dealing with recessionary conditions and here the government can play a catalytic role.
A number or packages have been announced in Mr Mukherjee’s short-term Budget, but there is a lot of criticism that such packages are not operationalised as quickly as the situation demands. The main culprits are the banks which are still caught in a certain inertia which survives from recent times when they were called upon to contain inflation by restricting money supply. In the present situation they have to turn back and race in the opposite direction by making money more easily available for recession-hit industry and other domestic sectors. Thus the role of banks is crucial and this demands utmost attention.
Another area which demands the finance minister’s active attention is reviving the languishing stock market.
Mr Mukherjee was the minister responsible for giving tremendous stimulus to the Indian stock market in the early 1980s, which led to its spectacular rise. One particularly remembers him reviving forward trading after a 10-year ban, which helped India become one of the major stock markets of the world. Unfortunately, with the sudden sell-off by foreign institutional investors in the last few months, the Sensex has dropped from the region of 20,000 to under 9,500. This is the level it was at before foreign institutional investors made their dramatic intervention about 10 years ago.
A massive effort is necessary to persuade institutions and common investors to buy shares. Many good shares are now being quoted at affordable prices as never before.
If Mr Mukherjee can ensure that institutions engage themselves in a massive buying spree, individual investors will surely follow and this in itself will lead to a spectacular revival of the Indian stock market, which in turn will lead to the disappearance of recession and deceleration.
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