The Indian economy’s fundamentals are sound. But the trillion-dollar question is: can India weather the global financial crisis? The World Bank thinks it can. Our policymakers too are looking at half-full glasses and continue to maintain that the economy will continue to grow at 7.5-8 per cent. But people are closely watching the raging turmoil and its negative impact on foreign institutional investments (FIIs).
Whatever be the perceptions and the reality — not always the same things — current conditions make India the second fastest-growing large economy, at a time when the world is passing through its worst economic tribulations since the 1930s. Such a prospect ought to restore some confidence in our battered stock markets that are tanking by the day. The rupee is also sinking like a stone and may soon touch a low of Rs 50 to a dollar. The scenario is only getting bleaker.
There has been a strong policy response. The Reserve Bank of India (RBI) has further cut the Cash Reserve Ratio that determines the amount of cash that banks park with the RBI. This will inject Rs 60,000 crore of liquidity into the system and facilitate more bank lending. Finance Minister P. Chidambaram has also made reassuring comments that there are enough instruments to ensure the stability of the financial system. He added that the government will continue to provide credit and other support for the growth of the overall economy.
These moves are, no doubt, welcome, but have to be seriously stepped up if the storm outside is to be kept at bay. Apex chambers like Federation of Indian Chambers of Commerce and Industry (Ficci) complain there are symptomatic signs of a credit crunch. Nearly 48 per cent of companies surveyed by Ficci were rescheduling their investments.
The probability that the financial meltdown will affect India’s growth definitely worries our policymakers. Besides the ongoing carnage, worrying signs include slowdown of industrial production. With agriculture likely to grow by 2 per cent, the decline in industrial growth will slow down the economy. Which means vigilance and pre-emptive action are absolutely necessary now.