Prime Minister Manmohan Singh on Wednesday said that the short-term outlook for the Indian economy was “cloudy” given the domestic liquidity crunch and the financial crisis that continues to rock the industrialised world.
Addressing a business luncheon in Tokyo, hosted by Japan’s biggest industry chamber Nippon Keidanren, Singh said: “It (domestic growth) will slow down in the current year because of conditions in the global economy.” Estimates by various independent think-tanks indicate that India’s gross domestic product (GDP) will grow 7-7.5 per cent in the current financial year. The slowdown this year needs to be seen in the context that India has, over the last four years, averaged a growth rate of 9 per cent, the second highest in Asia after China.
The RBI and the government, Singh said, were responding to the credit squeeze by injecting additional liquidity. Besides slashing the cash reserve ratio (the portion of deposits banks have to keep with the RBI) by 2.5 percentage points to 6.5 per cent from 9 per cent over the last three weeks, the government has decided to infuse more capital into banks to raise their capital to risk-weighted assets ratio to 12 per cent. These measures will ensure that the rhythm of economic activity in India is not disrupted, he said.
Singh expressed confidence that the economy has the resilience to sustain its growth momentum in the medium-term. “The fundamentals of our economy have been and continue to be strong. Our banking system is well capitalised,” he said.
“Once normalcy returns, we can regain the 9 per cent (growth) trajectory,” Singh said. The high savings rate and a dynamic private sector will help drive growth in the country, he added.
According to him, developing economies like India are affected by the crisis and must be part of the solution now. “We cannot afford to risk the gains we have made in the last few years. Nor do we want to remain vulnerable to infirmities in international surveillance, supervision and regulatory mechanisms in the future,” he said.
The RBI, which will come out with its busy season monetary policy on Friday, is likely to cut the statutory liquidity ratio by 2 percentage points from 23.5 per cent now to free up more money for banks to continue lending.
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