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HindustanTimes Sun,21 Sep 2014

Five years after Lehman Brothers debacle, scars remain

Gaurav Choudhury , Hindustan Times  New Delhi, September 14, 2013
First Published: 01:21 IST(14/9/2013) | Last Updated: 02:11 IST(14/9/2013)

On October 14, 2008, exactly a month after the US investment banking giant Lehman Brothers went bust triggering a worldwide financial crisis, Prime Minister Manmohan Singh conferred with finance minister P Chidambaram and the then Reserve Bank of India (RBI) governor Duvvuri Subbarao as they tried to figure out how to perk up nervous banks strapped for cash.

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No official word came on details of the meeting that followed previous reassuring statements to depositors, lenders and borrowers by the policy-makers earlier in the day.

The deputy chairman of the planning commission, Montek Singh Ahluwalia, and the then finance secretary Arun Ramanathan, who was heading a panel to suggest liquidity boosters, joined the meeting.

Only a week earlier, apart from cutting the mandatory cash deposit requirements for banks by 1.5 percentage point last week, RBI had offered Rs20,000 crore for mutual fund industry to enable it handle redemption pressures.

"We believe everything is under control. I cannot tell what measures are going to come. We have done everything... to be done," was all Subbarao would say.

What followed in the weeks and months that followed, however, was a slew of measures to help banks go ahead with stalled lending programmes to boost the economy and infuse confidence.

RBI slashed the repo rate, its key lending rate, by 3.5 percentage points between October 2008 and January 2009. This was followed by an unprecedented fiscal stimulus package for industry through tax breaks, cheaper finances and lower indirect taxes.

Add to this the Rs40,000-crore that the government handed out to its employees through pay commission arrears, kept the consumer spending buoyant.

Five years later, the macro conditions are dramatically different. The rupee has hit a record low amid fears of a ballooning current account and fiscal deficit.

India's economy grew by 5% in 2012-13, the worst in a decade. The prospect of a credit rating downgrade to "junk" casts a very long shadow over the market.

The imminent scale-back of an easy loan policy in the United States is the biggest factor hurting emerging market currencies. The government, already burdened by fuel subsidies, is readying itself to take on an annual Rs. 130,000-crore hit on account of guaranteeing cheap foodgrains to the poor. This is on top of a widening of the CAD in foreign exchange transactions.

The men tasked with steering the Indian economy through its latest crisis, finance minister P Chidambaram, and new RBI governor Raghuram G Rajan has announced a string of steps and  maintained that more reforms were the answer including promoting of manufacturing sector and exports to boost faltering growth, which needs to be raised to its potential rate of 8%.

India's economy grew by 5% in 2012-13, the worst in a decade. The prospect of a credit rating downgrade to "junk" casts a very long shadow over the market.

Ironically, the measures taken during the 2008 crisis has limited the government's elbow room to spend its way out of the current slide.

"The economic factors that became a problem was the overstaying of the past of the fiscal stimulus rolled during the crisis, namely the concession rates of excise duty," the Prime Minister's Economic Advisory Council (PMEAC) said in a report on Friday.

And unlike 2008, the RBI governor does not have the room to cut lending rates to aid industry and individual borrowing.

"We expect the RBI to persist with the tightening till mid-December," said Indranil Sen Gupta, India economist, Bank of America Merill Lynch.

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