The government is worried that an outflow of $4-5 billion in this financial year on this account could pull down the rupee further. It is thinking of setting up a fund to bail out companies that must pay off their creditors. The prospects of a sovereign ratings downgrade make the picture more worrisome. Reviving investor sentiment is crucial to take some pressure off second-rung companies that were building the India story on borrowed funds. The markets must be made to see India is committed to reforms and macroeconomic stability. The government’s recent decisions on cutting the diesel subsidy and allowing more foreign investments in retail, insurance, pensions and aviation have set the ball rolling. The markets have revived, but to climb further they would expect that the government delivers on its promises of further liberalisation and prudent economic management.
India Inc deserves a helping hand from the government during a lean patch. Companies are starved of credit because the government is borrowing too much of household savings to fund its social welfare agenda. They are thus forced to seek credit outside the country. With the central bank tightening interest rates to fight inflation, the economy also has slowed to a crawl. Both monetary and fiscal policy over the past couple of years have turned inimical to the interests of the Indian corporation, which has been spearheading growth in what was till recently the world’s second fastest growing major economy.