Current Recession: How far, How deep?

The ongoing recession in economies world wide that were supposed to be immune to such downturns is becoming a serious threat to both the industrialized nations like the US and China and nations constituting the third world countries like India. No doubt, analysts including economists laureates have began to expect unusual consequences as they eye every stock going down and witness market acquiring more instability. Fear of stakeholders losing their stock values have only added to the decline. Go by Barack Obama who said in a speech that it will take another year for the situation to get better, although added that the worse is yet to come before the situation gets better.


Recession, in all three forms viz. financial, credit and banking, is not new. Over 150 financial steeps we have seen since past 50 years of financial history. But the current situation is a far than similar.


Most financial instabilities and economic crises of past used to originate in developing nations earlier and G7 (industrialized) nations were then used to assist the victim economies by providing all suggestions and solutions to break it. Effects on developed nations then were not a major issue, or comparatively, not an issue at all. But this time, the reverse has happened with the only difference being that both sides are affected. The current financial crises began in the US and travelled slowly to affect EU and the eastern and Asian regions.


Dr. D. Subbarao, RBI General in an interview said that the model of banking that the EU nations has followed since long is been identified as insufficient and prone to give jerks in case of instabilities like the current scenario. Privatizations seem to be replaced by the model of banking we follow here in India. Specifically, India is giving inspiration to EU to adopt Nationalization of Banking industry and other such industries that govern the economic fulcrum of a nation by larger proportion.


The Indian economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India achieved 8.5% GDP growth in 2006, 9.0% in 2007, and 7.3% in 2008, significantly expanding production of manufactures. No doubt, India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Due to our liberalization policy that began in 1992 with Dr. Manmohan Singh, the then finance minister, our economic expansion has helped New Delhi continue to make progress in reducing its federal fiscal and trade deficit.


What hampers our growth and worries all income groups is the rising scale of inflation. Besides controlling price and financial stability, enterprises and regulatory bodies such as the SEBI and autonomous authorities like RBI have to ensure that enough credit goes to the developing sectors such as real estate and inflation is supremely checked. Targeting low and stable inflation is not easy if fiscal policy is poorly maintained so to devise an optimum fiscal policy is also an urgent need.


Dr. Subbarao assures in an interview that in India, job cut would never be an issue, however, companies who are largely dependent on FII and FDI would suffer. What is happening with the Guangdong province of China is a wide scale consequence of this. The province that account for over 1/3rd of China’s international trade has seen a shut of over 2000 factories recently largely because of no or a bare minimum export.


Of course we would not face a situation like the US as far as job cut is concerned, but there’s nothing to rejoice upon. We also need to turn to Small- and medium-scale enterprises (SMEs) occupy an important and strategic place to vision an equitable economic growth and development. Innovation and Entrepreneurship hold the key to enhancing the role of SMEs in improving the Indian economy.


Enough liquidity into the banking sector has been the first step RBI has rightly taken, followed by a cut in the Repo rate. What can augment to further stabilize the system would be a comprehensive stimulus package for the banking sector so that investors may not loose enough confidence to worsen the situation. Focus on improving the scale of foreign investment would only mark a figure into the box. In a situation like the current, when domestic investors themselves are refraining themselves from real investing or buying a new share, relaxing ECB norms in a hope to provide a greater foreign investment window only adds a trifling point.


What is needed in context of foreign investment is to building strong measures first to attract knowledge, innovation and investments from the overseas Indians including NRIs, PIOs and Overseas Corporate Bodies (OCBs) on same parallels as we invite expect other foreign investments according to the Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI) policy.


Amit Nigam

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