India Weighing Political Impact of Tough Economic Decisions by Sushma Ramachandran SignUp
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India Weighing Political Impact of Tough Economic Decisions
by Sushma Ramachandran Bookmark and Share
 
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)
12-Oct-2008
More by :  Sushma Ramachandran
 
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