Navigating through the turbulence

The Economic Times 15 December 2008

The economic storm that hit the Wall Street and gathered momentum in developed economies has reached Indian shores in the current quarter. The most visible signs have been decline in exports, sub-5 per cent industrial growth and reports of job losses, especially among the SME sector. Our policy makers have responded with interest rate cuts, across-the-board reduction in excise duty and a $4 billion additional expenditure plan. These early responses are, of course, welcome. But more steps may be needed to ensure that our economic growth does not derail in these turbulent times. India is being tested as never before.

As in China, economic growth for us is not an option but an imperative, leading as it does to employment and improvement in living standards for large sections of our society. We had managed to sustain a 9 per cent growth for the past four years, and our national savings rate had climbed to 35 per cent of national output. The shift in the growth curve had strong structural foundations of a favourable demographic shift, improved competitiveness and a per capita income approaching the inflexion point. It is important that we return to this trend sooner than later.

To do so, we need to grapple with three challenges. The foremost is the crisis of confidence that has engulfed us following the massive de-leveraging in the global financial sector and sharp correction of asset prices. The second is the drying up of channels of liquidity. While availability of liquidity has been addressed through RBI measures, its channelisation to productive activities still remains an issue. The third challenge pertains to the global recessionary winds that have affected the export-oriented sectors.

I believe we must confront the first two challenges head-on — the confidence deficit and channelisation of liquidity. Though there is little that we can do about the global recession, compensatory stimuli can always be released.

An important ingredient of our strategy has to be a much stronger fiscal support. This could come in the areas of infrastructure, health and education. For example, the roadway programme can provide quick stimulus to employment and output. The intra-state and smaller roads can be taken up by combining with the rural employment guarantee scheme, wherever possible.

The thrust in infrastructure could incorporate equity participation by the government in private sector infrastructure projects whereby the government’s support could be leveraged into a magnified boost to investments. The long-term returns of such an investment will be immense for the government.

Yet another focus area is to unlock critical sectors of the economy such as electricity and coal. Lack of electricity not only impairs industrial output, but also activities like education and even agriculture, since in many parts irrigation and electricity are interrelated. Power production has been a laggard, partly due to inadequate coal availability. Unlocking of coal resources for national development is an absolute necessity.

The financial sector is the lubricating oil for the engine of the economy. This is more true now than ever before as the liquidity crisis in October demonstrated. Continuation of robust bank lending is a must, particularly since most foreign resources have temporarily dried up. Non-bank finance companies constitute an important source of fund intermediation. We must ensure that asset and project financing NBFCs’ access to funds remain unimpaired. The cost of funds, i.e., interest rates, need to be pared, although at this stage access is more important than cost.

This is the right time to step up economic reforms and institutional reforms that can be confidence boosters. These could relate to deepening of financial markets by enabling pension fund investment into equity market, quick movement towards GST, mining reforms, reducing government stake in public sector banks, to cite a few. Such steps can send the much-needed positive signal that we are serious about sustaining high growth. Tapping into the global pool of savings of non-resident Indians and sovereign wealth funds in the Middle East through dollar-denominated bonds is worth the government’s attention as well.

On a somewhat different note, the government may need to support the competitiveness of Indian industries at this stage by considering safeguard duties or anti-dumping measures in certain cases. Recessionary conditions are likely to see a surge in protectionist measures and desperate export-pushing measures from different countries, including the US and China. So why should India not recourse to it? In such a milieu, proactive steps are the need of the hour.

Finally, the focus area for the corporate sector could be to redouble its efforts towards cost rationalisation and enhancing competitiveness. In the previous downturn in the late nineties, many Indian companies laid the foundation for their world class competitiveness through right-sizing, consolidation, supply chain management, inventory management and so on. It is time now to act decisively along similar lines again.

It is important not to lose heart and focus in such times. Look at the silver lining in an otherwise gloomy scenario. Energy cost and overall inflation will come down. For corporates, attrition levels could come down and talent crunch issues could moderate. Importantly, with our large domestic orientation, India will continue to be counted among the fastest-growing economies of the world.

The tide will turn at some point, for sure. The key is to ride it and not be consumed by it.