Impact of Global Meltdown on Indian Economy in 2009

Ashok Handoo

With the advent of 2009, economists are debating the extent of the impact of global meltdown on the Indian economy in 2009. The predictions range between somewhat optimistic to fairly pessimistic. But the common thread running is that 2009 will be challenging, indeed. The Deputy Chairman of the Planning Commission Shri Montek Singh Ahluwalia says the stimulus package part two is part of the government strategy to deal with the situation as it evolves. The fiscal and monetary measures taken under the second package are targeted to increase liquidity for pushing up demand, addressing the concerns of the industries and provide incentives to exporters that have been hit by the recessionary conditions. The first objective is aimed to be met by reducing the key interest rates further the CRR has been cut by point 5 percent, bringing it down to 5%. The repo and the reverse repo rates have been reduced by1% each, bringing them down to 5.5 % and 4% respectively. All this will leave more funds with the banks to enable them to lend more at lower rates of interest. The second objective will be met by curbing cheap imports. That explains why certain duties on import of cement, Zinc and ferro-alloys, TMT bars etc. which were removed earlier to fight inflation, have been restored. The third objective to boost exports is hoped to be met by a twin stroke-increasing duty drawbacks, which the exporters claim against the taxes paid on inputs needed to manufacture the item for export and extend the duration of the scheme up to the end of December this year. The government is able to do this because the inflation rate is consistently falling for the last one and a half month. As Shri Ashok Chawla Economic Affair’s Secretary in the Finance Ministry observes “the trend is clear. This will translate into lower interest rates.” There is a possibility of inflation rate coming down to a tolerable 5% by the end of the current financial year. Shri Ahluwalia is confident that despite the gloomy international economic situation India will register growth rate of 7 %. But, he says, fiscal deficit will be higher than anticipated on account of the stimulus packages announced. The mid-year economic review presented in Parliament, projects its increase to 5 percent against the target of 2.5 percent. The Reserve Bank of India Governor Shri. D Subbarao too admits that 2009 will be “more challenging” adding that the RBI will continue to do everything possible to mitigate the impact of global crisis on the Indian Economy. He however, says that the outlook for India and the world remains uncertain and the path of global crisis and its resolution remains unclear. That view is shared by the Nobel laureate Amartya Sen as well. Sen recently admitted that he did not have a ready answer to how deeply global meltdown will affect India in the New Year. The World Bank President Robert Zoellick predicts that the global economy is likely to “worsen” in the first half of 2009. The IMF chief concurs with him. The RBI has made it more than clear that it has a road map to deal with the situation and steps will be taken as and when required. To quote Shri Subbarao “our approach has been to cross the river by feeling the stones.” It has already lowered its key interest rates-the CRR to a 2 year low and the repo and reverse repo rates to an 8 year low. But there are areas of concern as well. Foreign investment flows have declined. The Commerce Minister Shri Kamal Nath informed the Lok Sabha that “FDI inflows between April and September 2008 showed an increasing trend each month in comparison to the same period in the previous year.” But he cautioned that FDI flows to the developing nations would generally decline in 2009. He was however quick to add that the government has put in place a liberal policy which permits FDI up to 100 percent on the automatic route, in most sectors and activities. The other area of concern is that India’s industrial growth has declined for the first time in 15 years. Since Industry accounts for about 25 percent of the country’s GDP it is bound to affect the growth rate. Exports declined by 9.9% in November last which is also worrisome. The RBI in its report says there are downsize risks from India’s increasing global integration such as the sustained outflow of capital, financial contagion and slowing world growth. It corroborates Prime Ministers view that in a globalised world, we cannot pretend that we will not be affected by the crisis that has been created somewhere else. But it says that use of a combination of instruments to absorb excessive pressure had helped cushion the impact on Indian economy. The silver lining is that since 50% of our GDP comes from the service sector, which is not affected much by the global recession, growth rate in the current year will end up around 7%. That is what the mid- year review estimates. Five years of nearly 4% farm growth and high domestic saving rate of 36% is seen as making that possible. That the government is alive to the situation is apparent through the measures it has been taking in association with the RBI from time to time. It has raised public expenditure by Rs.20,000 crore through the first stimulus package announced on December 7. The RBI too injected Rs.300,000 crore liquidity into the system through a series of cuts in rates . The second package will increase availability of funds with banks and non-banking financial companies by 75,000 crore. The state governments too have been allowed additional market borrowings of Rs. 30,000 crore. It is now for the Banks and the big industries to fulfill their share of responsibilities and ensure that the measures taken are effective. They need to move hand in hand with the government. Time and again, the Prime Minister has been assuring the people that despite the international environment the country has the capacity, ability and resilience to cope with the present global crisis. He has been citing the economic crisis of 1991 which Asia faced and which was “more” serious, but India overcame it efficiently. With steadfast commitments of all the players in the field we look forward to see India coming out of the present global crisis with minimum bruises. *Freelance Writer Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB Source: http://pib.nic.in/