The current crisis happened because of improperly working financial markets, and the solution also lies there. A liquidity crisis arose in September abetted by government action (large amounts were withdrawn from the system to pay taxes and interest rates were high). The government has already taken corrective action, and is expected to take some more in coming weeks. Interest rates are also expected to go down. But despite this the pessimism continues, and stories of organisations holding cash and slashing expenditures continue.

To improve confidence and remove pessimism from the markets, the government needs to ensure that markets are strengthened, and it signals universally its faith in Indian private initiative and markets — just as we support a child who has failed a test. There are many possibilities within this larger framework. And pump-priming is not one of them.

First, high interest rates have made many projects unviable, so interest rates need to go down (inflationary expectations are also down). Second, there are a range of regulations that prevent smooth flow of funds within and between the financial and real sectors. Third, many companies have become undervalued; let the pubic sector resort to equity market purchases in the stock markets — other countries such as Taiwan have done it. Fourth, real estate overpricing is a real problem that needs to be corrected. A good quality real estate index is being developed and good information works wonders in introducing sanity in a market. The key is to ensure that government action does not help in sustaining a bubble, as that will only create a more serious problem later (and pump-priming can very easily create another bubble). Fifth, by all means improve infrastructure, as long as it is not based on ad hoc public sector action. Outsourcing IT infrastructure creation within the government is one such example, where our IT companies can compete.

... contd.