Act bold, and fast

Lending rates for Corporate India are very high despite strong demand for credit. All sources of overseas borrowings have dried up and domestic equity markets are in tatters.

It takes a crisis, and then, for ever, for India to react. Be it the domestic economy or the country8217;s internal security, the government8217;s response has unfortunately been neither bold and substantive, nor quick. The horror of the Mumbai terror attack is vivid in people8217;s minds and the government had to be seen to be taking action. This manifested in the ouster of some top guns and an announcement to prepare a plan to overhaul internal security. These were yesterday8217;s tasks, but never mind. However, the job of putting in place a crisis infrastructure to counter urban terror of this kind takes time, effort and single-minded pursuit. Is the government up to it? That time will tell, but then, it needs to be tracked closely should there be any let-up.

But as far as gross domestic product GDP growth rate is concerned, the first signs of a powering down of the economy were visible roughly a year ago. It was then that the US financial crisis was simmering, interest rates in India had started hurting business sentiment and the growth rate in industrial output was showing signs of stress. But, inflation expectations were high, and arguably the Reserve Bank of India kept a tight leash on its monetary policy: both the repo rate, or the rate at which the RBI lends to banks, and the cash reserve ratio, or the portion banks have to keep with the RBI, were being hiked to discourage banks from lending. Inflation control, and not growth preservation, was the mantra then: criticised by some and appreciated by others.

In the past six-nine months, we have seen the unfolding of the US financial crisis that spread like a contagion to Europe and Asia-Pacific. It spilled over to the real economy with the US and much of Europe fighting recession or recessionary trends now. India, that averaged a stellar growth rate of nine per cent on an average over the last four years, is now grappling with a situation where exports are decelerating, manufacturing is contracting and markets are bleeding. For the first time since its launch in April 2005, the widely tracked ABN Amro Purchasing Managers8217; Index has plunged to 45.8 in November, below the neutral mark of 50, reflecting lower spend by companies. It is in many ways, in former RBI governor Bimal Jalan8217;s words, a special situation calling for bold moves.

For at least the last two months, Prime Minister Manmohan Singh, who is also the finance minister since Sunday, has been talking of counter-cyclical measures or increased expenditure that can act as a powerful stabiliser in times of a global meltdown. In fact, on his way back from Washington DC after the Group of 20 leaders Summit on the World Economy and the Financial Markets on November 15-16, Singh said a falling inflation rate increased the scope for the aggressive use of monetary and fiscal policies to spur growth. It is more than a fortnight since then and inflation has dropped to a five-month low of 8.9 per cent for the week-ending November 9. Expectations are inflation will fall further in the coming weeks, with the government even considering a cut in petrol and cooking gas prices after the assembly polls. In brief, inflationary expectations are more benign than ever.

In India, as in all countries, fiscal policy is the government8217;s preserve, and monetary policy the domain of the Reserve Bank. Increasing public expenditure in infrastructure is easier said than done for more reasons than one, as the now former finance minister, Palaniappan Chidambaram, will tell you. 8220;In China, you can decide on a big-ticket infrastructure project today, and start work tomorrow. It takes at least six months in India,8221; he said in a casual chat with this correspondent on board the PM8217;s special aircraft while returning from Washington DC after the G-20 summit. The UPA government8217;s progress card on spending on roads, power, ports and airports is nothing short of dismal. In 2008, despite the prime minister8217;s claim that he and Chidambaram had anticipated the global slowdown and hence had adequately provided for it in the budget, the national highways project has come to a standstill. Port projects are stuck in legalese and clarity eludes public-private partnership in airports. The woeful position of state electricity boards has scared away private investors from putting up power generating stations.

The prime minister8217;s confidante and Planning Commission deputy chairman, Montek Ahluwalia, cannot but acknowledge these. His infrastructure expenditure plan, to be submitted to Manmohan Singh in a day or two, hopefully is grand and bold without getting restrained by concerns of fiscal and revenue deficits. Spending money, ironically, is not so easy in the infrastructure sector, but Ahluwalia can remove procedural bottlenecks and pave the way for digging the ground for new projects. Having said that, the next best alternative is to step up expenditure significantly in ongoing projects.

And on the monetary side, it is high time the RBI swung into action. Fortunately, India is in a position of strength: global commodity prices led by crude oil have plunged, inflation has slipped to single digits, we have comfortable foreign exchange reserves and the balance of payments position is sound. All this only lends for the RBI to be much more aggressive in filling the credit vacuum despite the banks8217; best efforts. Lending rates for Corporate India are very high despite strong demand for credit. All sources of overseas borrowings have dried up and domestic equity markets are in tatters, leaving no avenue for companies but domestic banks to tap. It is for the RBI to overwhelm the banking system with enough credit. It must wield the axe on the CRR, at 5.5 per cent now. Instead of piecemeal cuts, the system must be flooded with liquidity by reducing the CRR to three per cent at one go. Simultaneously, a sharp reduction in the repo rate, which is a signal for banks to cut lending rates, and a modest cut in the reverse repo to discourage banks from investing surplus in government securities, will do the trick. Bold, but better done today.

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