Act bold, and fast

It takes a crisis, and then, for ever, for India to react. Be it the domestic economy or the country’s internal security, the government’s response has unfortunately been neither bold and substantive, nor quick. The horror of the Mumbai Terror attack is vivid in people’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 yesterday’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 Managers’ 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 Jalan’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.

... contd.

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