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Opinion
India Weighing Political Impact
of Tough Economic Decisions
by Sushma Ramachandran
The tsunami like financial crisis
engulfing the globe has flooded India as well, virtually drowning the stock
and currency markets. The response of the Indian government has so far been
somewhat slow. It has set up a committee to study the problem of liquidity
as late as Friday, while the central bank has yet to announce a cut in
interest rates.
The Reserve Bank of India (RBI) did take one rapid decision to cut the cash
reserve ratio, which has already unleashed about Rs. 600 billion (around $13
billion) in the market, but frantic bankers are saying this is just not
enough to contain the crisis. With the global crisis getting worse every
day, there seems to be no end in sight to the bloodbath on Wall Street or
Dalal Street. And the proposed committee on liquidity has been given a week
to submit proposals which seems to be seven days too long during this
unprecedented global financial crisis.
Described as the worst banking crisis of the last century, the current
financial turmoil is even being compared with the Great Depression of 1929
but there is a critical difference - the global reach of the situation in
today' times. Globalization has meant financial markets all over the world
are interconnected. Thus markets from Russia to Thailand, China to Iceland
are facing grave pressures on the economy.
Even India, which was considered immune to the fever consuming the US and
European bourses, has fallen prey to the virus in a much greater degree than
had been imagined by any stock market analyst and expert. Concerns in this
country for the last few months had centered round inflation and excess
liquidity in the markets. The situation has now completely reversed and the
central bank suddenly has to worry about shortfall in liquidity.
The apparently slow response of the Indian government to the crisis despite
many soothing comments made by Finance Minister P. Chidambaram has much to
do with the political outlook for the next few months. A virtual
mini-general election is on the cards in November with as many as six states
going to the polls. This is likely to be a kind of referendum to next year's
general elections and the state of the economy is going to be a key factor
in winning or losing.
Inflation at double digit levels has already hit the common man hard. So
policy makers have till now been strenuously trying to ensure that price
rise remains contained to the extent possible. Their efforts have largely
been stymied by the phenomenally high world crude oil prices that have had
their impact on the Indian economy inspite of the minimal pass-on to the
consumers at the retail level.
Even so, inflation seems to have peaked and is now hovering around 11.5 per
cent but a moderation to single digit levels is expected only by the end of
the year. In this backdrop, the latest crisis with the stock markets
crashing and rupee falling to record lows against the dollar has come as yet
another blow to a government looking forward to reap the benefits of its
achievements before the elections.
Instead of triumphantly hailing the signing of the Indo-US nuclear deal,
Prime Minister Manmohan Singh and his finance minister have had to make
calming announcements about the continued stability of the banking system,
stock markets and the economy in general. It is all the more disturbing for
them since the banking system in this country has not been exposed directly
to the sub-prime crisis in the US and is actually only suffering from the
indirect impact of the ills facing the entire global regime. In fact, it was
the inherent strength of Indian banks that made most analysts confident that
the sub-prime crisis would blow over without having a significant impact on
this country.
Unfortunately, India can no longer remain immune to worldwide financial
panic and this has been reflected in the country's bourses that have crashed
during the past week. One of the major factors for this has been the pullout
of foreign institutional investors (FIIs) who have had to deploy their funds
elsewhere owing to the worldwide meltdown.
To add to the misery of investors, the rupee has fallen to historic lows
against the dollar. This is again an anomaly since there have been more
concerns about the rupee appreciating strongly against the dollar in recent
months, especially as it had affected export efforts. And the final blow, of
course was August's industrial growth data showing a minimal 1.3 percent
rise, clearly indicating that recessionary conditions have crept into the
manufacturing sector.
On the plus side, the government has made all the right noises to soothe the
stock markets, which are generally prone to move nervously in times of
financial crisis. The crash of bourses globally is being described as panic
selling and the situation is no different in this country.
But on the negative side, the central bank and the government have not moved
fast enough to deal with this completely new and unexpected reality of stock
markets moving down in alignment with exchanges in the rich countries. They
will have to take decisions such as interest rate cuts to release more
liquidity into the system and allow the corporate sector to make further
investments in infrastructure and manufacturing to prevent the onset of a
recession.
This may not be the best move politically as it may push up inflation for
the time being, but clearly there is little option right now. And since
there is no room to maneuver, the government might as well act as fast as
possible before any more damage takes place.
Some say the government is in denial and is unwilling to face the reality of
the current crisis. The fact is that it is alive to the reality but is
uncomfortably aware of the political impact of the decisions that will have
to be made in the next few days and weeks. And that has slowed down its
response. But the very fact that Chidambaram has cancelled his trip to the
annual meeting of the International Monetary Fund (IMF) has raised hopes
that palliative measures will be taken sooner rather than later.
(Sushma Ramachandran is an economic and corporate analyst. She can be
reached at sushma.ramachandran@gmail.com)
October 12, 2008
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