October 23, 2008 10:35:59 pm
This newspaper’s argument that the financial crisis meant that India needed substantive reassurance from its political leadership predates political efforts to do the same. The prime minister saying the commitment to growth has been strengthened, the Centre asking for Rs 200,000 crore in supplementary grants and coordinated action to restore liquidity have at least partially changed the game. The finance minister’s announcement that seven banks with capital adequacy ratios of less than 10 per cent will be recapitalised adds to that sentiment. The amount of recapitalisation won’t be huge — but it’s the signal of current and future that’s crucial here. But as all economic managers should know, in a crisis fear doesn’t need facts and facts don’t always help confidence. So this is just the beginning for the policy-making establishment. At the minimum we are looking at a few months of proactive confidence-building. That means, among other things, being heterodox about new institutional arrangements. The committee on liquidity is one such idea that has already worked. It worked because it didn’t behave like a committee — quick actions even as the committee was sitting, instead of a wordy report with hedged conclusions at the end of a longish period. Remember that a week can be a devastatingly long period when confidence starts eroding.
Other out-of-box ideas like a war room to monitor and anticipate stresses and take remedial actions have also reportedly received official blessings. But while top regulators and key finance ministry officials may stick to the at least once a month meeting schedule, a second tier group of technically equipped professionals should brainstorm more frequently. One of the basics of a crisis situation is that information often has to be teased out of market indicators. This needs careful analyses of complicated data and it is unrealistic to expect that this can be done by top bosses meeting once every 30 days.
Like the 1991 policy course correction, crisis management of this order is a first-time event for India. The success of reforms has massively raised the costs of failure. That realisation should concentrate minds.
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