A meeting, chaired by Finance Minister P. Chidambaram, on October 29 in Delhi deliberated on India’s strategy for minimising the impact of the global economic downturn on India. It recognised the touch points where the impact is being, and will soon be, felt and the potential remedial course. The meeting also raised some critical questions, leaving them unanswered for now.
On fiscal policy
The UPA Government is weighing the option of amending the Fiscal Responsibility and Budget Management (FRBM) Act to free itself of the worries—and the compulsion— of limiting its overspend over income. The question is: should the FRBM Act be amended to provide counter-cyclical stimulus using fiscal policy? This was precisely what was discussed between the key Indian policy makers. The Act mandates a reduction in fiscal deficit to 3 per cent of the GDP by March 2009. A consensus on this relaxation is yet to be arrived at.
On financial markets
The to-do list emerging from the meeting includes increasing dollar liquidity for firms, given the collapse of the money markets in London. Also, since the companies that indulged in overseas acquisitions and took on one-way bets on the rupee are facing funding difficulties, they could go bankrupt unless provided access to adequate equity and debt capital for firms. Thus, “in the short term, companies lack the flexibility to lay off workers, or adapt production processes,” the meeting noted, concluding, “to avoid bankruptcy, access to debt and equity capital is a must, which means markets need to have a good financial structure.” The group agreed that the liquidity infusion of Rs 2,70,000 crore by the Reserve Bank of India could stoke inflation and also fuel the next asset bubble, which, the central bank must have the tools, to prevent.
On the real sector
While the financial markets are bearing the brunt of the global crisis, the real impact of the global shrinkage in jobs and exports is yet to be felt here. The group agreed that the impact on the real economy will be visible between October 2008 and October 2009.
The most vulnerable, it fears, are export-oriented sectors such as textiles, since 15 per cent of India’s exports head to the US. The dependence on services exports to the OECD and especially the US is big, as they plugged 40 per cent of India’s yawning merchandise trade deficit of $90 billion in 2007-2008.
On global financial regulation
The meeting also highlighted the absence of multi-lateral institutions parallel to the WTO for addressing issues arising out of globalisation—the coordination of monetary policy and regulation of cross-border capital inflows and financial instruments.
Should the need for bailouts arise here, too, the policy makers dwelled on the best way to rescue distressed institutions and companies. While the US has opted for increased government control, the UK is increasing its ownership of distressed financial institutions. The question asked was: is restructuring of regulation better than public ownership, since statist economies have fared better?