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email: pragnya.ram@adityabirla.com
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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.
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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. |
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