The Indian economy is apparently feeling the heat of global economic crisis. There may be difference of opinion with respect to the magnitude of its effects, but there is no denying the fact that the contagion has started spreading gradually into the financial health of the nation.
Figures released by Index for Industrial Production (IIP) a week ago stated that the Industrial production has shown negative growth of 0.4 per cent. The data suggested that in the same month of previous year, the growth in Industrial production had been 12.2 per cent.
The figures also suggested that except the coal, all other key infrastructure industries like cement, electricity, finished steel, crude oil and petroleum refinery products and others showed growth in decline mode.
These data sounded alarm in the North Block and the then Finance Minister hurriedly reviewed the situation. Soon after this, a set of disagreement appeared in a section of the media refuting the figures on the basis of method of calculations in finding out the figures of Industrial growth.
IIP also made some correction and clarified that the slowdown is not of that magnitude and the figures are a little bit miscalculated and thereby inflated.
Nonetheless, there is no denying the harsh reality that the slump has started making its jittery felt in many sectors of the economy.
In this backdrop the statement of India's Commerce Minister Kamal Nath, that there is decline of 26 per cent in Foreign Direct Investment (FDI) assumes much significance. The decline means that lesser funds were coming into the economy from outside.
According to an estimate, the FDI had swelled over a period of time and has risen from a dismal Rs 95,639 crore in 2003-04 to rocketing Rs 1,654,949 crore in 2007-08.
The external commercial borrowings (ECB) which had registered 30 per cent increase during 2006-2007, suddenly nosedived in October 2008 when it declined from Rs 283.49 crore in September 2008 to Rs 112.52 crore in October 2008 showing a reversal trend of 30 per cent.
If fact, the total FDI from US itself during 2000-2008 is about US $5.4 billion. The worst hit by this reverse cash flow is the software industries, which witnessed decline of 5.8 per cent in FDI.
This sector has been the fastest growing among all sectors registering 70-80 per cent growth rate per annum over a period of time, contributing US $8.4 billion in 2007-08 to India's foreign exchange reserve.
The swelled forex and spilling FDI have also been witnessed in increase of the share of import-export to gross domestic product (GDP), which has increased from 21.2 per cent in 1997-98 to 42 per cent in 2008-09.
Undoubtedly, since the contraction in global trade, volume of export-import would now decrease resulting in cascading effect on the overall growth of the economy. In fact it has experienced 12 per cent down fall in the month of October 2008.
Meltdown: Its Global Impact
The US, UK, France, Germany, Italy, Canada, Japan and a host of other developed nations have officially entered into recession. Most of them have announced so-called bailout packages also for taking the ship out of the economic tsunami or at least to mitigate the effects of this contagion on their people.
For instance the US, Russia, the UK, Germany, Belgium, Ireland, Iceland and France injected US $990, US $200, US $876, US $50, US $16 and US $864,300 billion, respectively, in form of bailout packages.
Indian and China, however, acted slightly differently. Instead of injecting money directly into market, China launched massive infrastructure construction by making available US $586 billion and undertook massive construction in roadways and railways, whereas; India reduced CRR, SLR, Repo and reverse Repo rates and increased the diameter of pipes flowing money into the market through banks.
It is due to this paradigm shift in strategies of mitigating the crisis, India and China stand at slightly different stage.
But in West and America, these monetary injections also could not act as anti-pyretic and the fever continues to run high except for transient respite in the economy.
The growth rate of Japan has shrunk to less than one per cent and rate of un-employment is rising unprecedented. Only few days ago, Sony, the electronic giant, has decided to cut the job by 80,000 and to shut 10 per cent of its factories across the world.
The US economy was worst hit and left nearly 573,000 Americans jobless, while the loss of job touched the dangerous level on one million. Thousands of European and American citizens are left homeless now due to debt-fuelled housing bubble.
The US Labour Department's figure suggests that the rate of unemployment has increased to 6.7 per cent in November 2008. The GDP of USA in Q3 is dismally minus 0.5 per cent. Federal Reserve estimation is that the US economy is expected to contract at an annual rate of five per cent or so.
The Federal Reserve has been continuously decreasing the rate of interest but in vain. The magnitude of fiscal leverage and financial deregulation are such that the Treasury Department has not yet been able to know that how much money actually is involved in 'toxic assets' of the banks in America facing closure, so that healing measures might be taken accordingly.
The other indicators in the US are also not encouraging. For instance, the consumer spending has come down by 3.4 per cent and consumer durable asset spending has fallen drastically by more than 14 per cent, which would led to further cut in supply resulting in contraction in the economy.
Russia could also not remain insulated. Russian forex of US $600 billion is fast depleting. The manufacturing industries witnessed 15.3 per cent slump whereas; production in core infrastructure like coke, cement, fertiliser and rolled metal fell by more than 30 per cent.
The scene is not different in other parts of Europe. The growth fell to minus 0.5 per cent in Germany, to minus 0.3 per cent in France and Italy and not surprisingly zeros per cent in Netherlands and Spain.
The 'European Rescue Plan' of European Union has failed to take off owing to lack of consensus among member countries. Germany is reluctant to support Britain and France on most of the issues. There are several issues where disagreement is putting hurdles in progress. The scramble for leadership in new global financial order has begun.
The much talked Washington Summit held last month, has also failed to yield positive results because elusive consensus could not be arrived at. The West's frowning on capital control and their staunch penchant for laissez-faire have been allowing the situation going from bad to worse.
India: Where It Stands?
Indian economy, though in stress, has been doing fairly good in view of prevailing situation. The growth rate is expected to be 6.5 to 7.5 per cent, if not more.
The rate of inflation has been witnessing downward trend in successive weeks and has come down to single digit number, it is expected to come down further, thanks to the bold and effective fiscal and monetary measures taken by RBI and Ministry of Finance.
The major contributors to the GDP like service and agriculture sectors have not hitherto affected as badly as other sectors. The flow of FDI in service sector which roughly contributes 45-50 per cent to GDP has risen from Rs 13,903 crore in 2003 to Rs 143,776 crore in 2007.
Agriculture: It continues to play a vital role in growth of India contributing 20-24 per cent to the GDP. As the financial market has very little to do with the agrarian economy, the financial crisis has not affected this sector to the extent it has affected other sectors of the economy.
The ‘loan waiver’ of the Union government announced in the budget this year has provided stimulus to this sector and is working as bailout package.
Although it has failed to check the farmer’s suicide completely and according to National Crime Record Bureau (NCRB) 16,632 farmers have committed suicide in 2007 in which 4238 have lost their lives in Maharashtra only.
Recipe for India’s Bailout
Instead of mimicking the west and US, India needs to think in terms of evolving strategies to mitigate the after effects of global contraction by increasing the domestic saving and domestic market demand. There are some steps which are urgently required to mitigate the effects of global recession.
Making available money for public spending: With the flight of foreign capital the market is likely to contract, leading to fall in production and demand. The consequential effect would be as expected—discernible in rise in unemployment.
This would create a vicious circle and if India gets trapped into it, would enter into recession. It is said that every cloud has a silver lining. The best way to get insulated from it is to unearth capital and money from within, instead of begging from others.
The country also needs to have voluntary disclosure scheme (VDS) like measures to take the black money out of the shelves of millions of people in India.
The volume of domestic saving in banks and post-offices can further be increased by taking some specific monetary policies. This would ensure increase in availability of liquid in the market and help taking fiscal steps to tide over the crisis more effectively.
Help from external source at this juncture when every nation, rich or poor is facing acute fiscal crisis, is a futile and unwise venture.
Need to shift lending pattern of banks: The fiscal and monetary steps taken so far by the Reserve Bank of India (RBI) and Finance Ministry have not been as unsuccessful, as many economists had thought. Unfortunately, all focus is converging on big industries and banks.
The media hype has been diverting the government's attention from a very crucial sector, which is comprised of tiny and non-farm small units, which are about 5,800,000 in number.
This vast sector has been providing employment to about 105 million people in this country contributing about 30 per cent of GDP. Ironically, these units get only four per cent of net bank credit. What neglect and what an unwise fiscal decision on part of banks!
The attitude of the banks needs to be changed. The experiences suggest that a bank manger is more interested in disbursing loans to bigger entrepreneurs rather than small investors.
It is perhaps due to the fact that they are interested in achieving financial targets and not physical. They feel it convenient to deal with less number of entrepreneurs for obvious reasons.
If the credit given to these units is increased only by one per cent, it would bring about unbelievable change in the growth pattern of the economy. It would increase about 10 crore employment and add further about 0.5 per cent to the GDP.
Merely injecting liquid into the market either directly or indirectly through cut in interest rates is not going to solve the situation for ever.
The bailout packages across the world have failed to mitigate this economic crisis for many reasons, one being siphoning off the money by big banking and business tycoons.
Stimulus for unorganised sector: The unorganised sector in this country has been hitherto a neglected segment. However, the passing of 'unorganised workers social security Bill, 2008' by the Indian Parliament only a couple of days ago, can be hailed as a milestone in the economic history of this nation.
At present, according to an estimate, there are as many as 30-34 crore unorganised workers in this country. National Commission for Enterprises in the Unorganised Sector (NCEUS) has recommended for setting up of a Nabard like financial institution so that loans can be made available to them at comparatively lesser interest rates and more conveniently.
Now doubt the, the country needs to have a more generous policy towards them not because they are at the fence; rather they are contributing magnificently to the overall growth of the nation.
Unfortunately even after successive robust growth, only 20-25 per cent of the population have been dinning the slice of development and rest are still longing for a loaf of dividend.
This is not philanthropy but is pure economics, the Keynesian theory, of which the West boasts off so frequently. Let the purchasing power be increased of majority of the population; or else the citadel of prosperity would crumble down.
This is what is happing globally. Shopaholic culture of west and unfettered financial institutions are not suitable for country like India.
Food, social security and rural development schemes: Many Western countries including America are now a little bit surprised to the see India get going with relatively more pace in this period also.
The west’s frowning on laissez-faire now faces extremely rough weather. The American and European newspapers which usually used to be flooded with editorials and columns deploring and criticising slow pace of reform in India; now preach their own governance and financial system about the capitalism blended with social responsibilities.
India has a well institutionalised chain of Public Distribution System (PDS) shops (4.78 lakh) and which is catering to needs of 652.03 lakh Below Poverty Line (BPL) families.
There may be pilferage here and there in this chain of distribution of food grains, but one cannot deny the importance of these shops in terms of maintaining supply line strong enough to cater to the needs of billions of people in rural areas.
It ensures actually at least enough food grains in the local market otherwise the situation in the countryside would have been much more precarious. The availability of food grain helps stabilising the price of commodities also to an affordable level.
The social security schemes like old age pensions, family pension, widow pensions, stipends for poor students and a host of other such schemes are like blood capillaries of the economy.
Such measures are being taken by the west as crisis management steps, whereas in India these are part of the institutionalised but non-philanthropic schemes.
These are the measures which are proving very helpful in this hour of distress. It is not merely a chance that we are not hit as hard as the west and other nations are; rather it is due to our socialistic and humane approach which is paying dividends.
The National Rural Employment Guarantee Act, 2005 (NREGA) was a land mark in country. While year 2008-09 budget had allocation of Rs 16,000 crore, an additional Rs 10,500 crore was made available to this innovative scheme. If all wage oriented rural developmental schemes are added, it comes roughly more than Rs 60,000 crore.
Many people may not be optimistic about the performance of these schemes on the pretext of reports of corruption and otherwise, but it is acting as a bailout package in this period of economic crisis.
It has magnificently increased the purchasing power of millions of poor Indians, which according to Keynesian also mitigating the after-effects of economic slowdown.
Reforms in financial sector and monetary policies: This crisis is all set to unleash forces of resurrection and drastic reform. When Asian crisis hit majority of countries like Malaysia, Indonesia and Hong Kong, America prescribed menu for their revival; which included three things.
Firstly not to cut interest rates. Secondly let the banks go bankrupt and thirdly encourage saving and cut public spending. Ironically, when America is hit this time, it is doing exactly the reverse.
The toxic assets have been bought, interest rates have been drastically cut and finally the public spending is enhanced and public is being advised to spend more.
How can be two prescriptions for same ailment? Hindsight is always better than foresight. We must ponder on the financial sector reforms, a reform not to benefit corporate sectors only, but for the poor people also.
The CD ratio of many states has to be improved in order to bring parity in the development. The blind imitation of West in this sector is disastrous; it has been proved.
Even the Americans have now started discussing the legitimacy of blind race of development based on excessive financial leverage.
Cutting of CRR, SLR, repo, reverse repo rates are good to some extent, but it should also be ensured that money is used to ease out the effects, and not being siphoned off by unscrupulous speculators and corporate managers as was done in USA and Russia.
Public spending in infrastructure has to be further increased. According to one estimate about 80 per cent of the infrastructure is created by the public spending. It helps create infrastructure at the same time generate enormous employment opportunities.
The SEZ policy, which has been borrowed from China, should be re-defined. This cannot be allowed to be used for real-estate developers. In fact present outcry by a section of farmers in different areas are said to be due to this reason. It ought to be oriented for industrial ventures and creating infrastructures.
India should stake claim in the emerging new global financial order: The American dominance on global financial order is all set to come to an end. The wheel has turned around and American economy is in desperate need of money from developing nations like China and India.
Undoubtedly, China has emerged as the biggest player and largest bargainers in this present crisis. Its huge forex of US $600 billion and huge domestic saving has started paying dividends.
IMF Chief has set two per cent growth rate for major countries and suggested that government spending should increase and interest rates be further cut.
However, it is important to figure out the source of the money so required. Besides, one needs to find out how the government can enhance public spending? India has still a huge potential of domestic borrowing.
The government will have to instill confidence in masses to encourage bank deposits. India has to come forward with renewed vigour and stake claim to be a major player in the new world order.