The Hindu Business Line : An economy in search of policy

Judging from the ongoing meltdown of Wall Street and the fluctuations in US policy reactions last week, it becomes clear that one of the most important items on the agenda of Asian emerging economies is the attempt to ring them against the raging fires in the West.

While the US Congress dithered on the Paulson-Bernanke proposed bailout, central banks in China, Taiwan, New Zealand and Australia reduced interest rates while those in Malaysia and Sri Lanka maintained them even as inflation rates shot up. Alongside, governments are combing their policy books for ways to prevent their economies from sliding into recessionary mode.

But export-dependent emerging economies may not have much elbowroom for public policy intervention. India has, but so far there has been stunning silence from policymakers.

The equity market is slipping drastically for reasons that are fairly well-known; the FIIs are pulling out and they have been its mainstay during the bull run.

Last week SEBI chief Mr C.B. Bhave and Finance Minister Mr P. Chidambaram did try assuring investors of the soundness of the market but everyone knows just how important the FIIs have been.

Rhetoric only

Apart from that rhetorical intervention, there has been little else by way of action to protect the economy from even the most indirect effects of the global credit crisis.

It was left to Mr K.V. Kamath of ICICI Bank and a somewhat vapid RBI note to assuage panicky depositors and a jittery market of the soundness of the second largest bank.

But from New Delhi there has been a deafening silence. The last major announcement to come out of the Finance Ministry on September 22 liberalised ECB ceilings for infrastructure projects. The timing could not have been more inappropriate given the tightening credit squeeze and the likely difficulty Indian companies will have in raising resources. Western banks are unwilling to lend to one another — a major cause of the credit crisis — and they have less reason to lend to complete strangers like infrastructure companies.

The sector is still mired in a thicket of ambiguities that need sorting out, not the least the land acquisition problem. As it is, ECBs in August more than halved to $1.6 billion from the previous month and will decline even further, forcing companies to seek domestic funds that are more accessible but more costly too.

Looking to the US

While the Prime Minister was moving closer to nuclear arrangements with France and all of New Delhi seemed riveted to the historic moment when the US Congress would ratify the deal, closer home things are coming apart.

Last weekend, Tata Motors finally packed their bags in Singur. Apart from the Prime Minister’s feeble hopes that things would work out well, nobody in New Delhi seemed interested one way or another.

Corporate evidence points to declining sales, and the gloom in the equity market will extract a price on new IPOs.

By implication and in the absence of any policy intervention that can lift the pessimism, the only salvation for the economy seems to lie in the US and the capacity of the US Fed and Mr Hank Paulson to stem the rot and let the sunshine in.

In sum, policymakers seem to stake growth prospects on the nuclear deal — the only substantial policy initiative in months — and fortuitous circumstances: a good monsoon, falling commodity prices and a receptive US legislature to keep the economy on high street.

Some proactive intervention in public policy, for instance steering the crucial legislations on land acquisition and the Mining Act through Parliament and a joint Centre-State strategy on SEZs would ease some infrastructure pains just as an alert RBI adjusting monetary policy to the current dispiritedness would crank up the economy’s stakeholders.

A wing and a prayer are fine, but Mr Paulson can do only so much on his own.

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