The Hindu Business Line : Manmohan sees temporary slowdown

The Prime Minister, Dr Manmohan Singh, has admitted that the ongoing global financial crisis is likely to have an indirect impact on the Indian economy and “we must be prepared for a temporary slowdown.”

“The precise impact is difficult to estimate at this point since the depth and duration of the global slowdown remain uncertain…Our effort will be to minimise the negative effect of the financial crisis and, once the global situation stabilises, to return to the growth trajectory of nine per cent,” the Prime Minister said in a suo moto statement made in the Lok Sabha on Monday.

CMIE data

Dr Singh, however, took comfort from the fact that even the most “pessimistic estimates” of GDP growth for the current fiscal “place it at no less than seven per cent.”

He also drew attention to the latest Centre for Monitoring Indian Economy (CMIE) data, which “shows that a huge amount of money towards capital expenditure is in the pipeline.”

The Prime Minister further sought to stress that the current liquidity crisis, originating from the collapse of the US and European housing mortgage market, has little bearing on Indian banks.

“The Indian banking system is not directly exposed to the sub-prime mortgage assets. Their exposure to other problem assets is also minimal.

“Our banks, both in the public sector and in the private sector, are financially sound, well capitalised and well regulated. There should be no fear of a failure of any bank.

“I wish to assure depositors in our banks that their deposits are entirely safe”, he stated.

The squeeze on liquidity has been more on account of the drying up of external commercial borrowings and international suppliers’ credit availed by domestic corporates.

“This has led to a reduction in overall credit availability in the economy even though credit from commercial banks has expanded satisfactorily”, he noted.

Dr Singh was confident that the Reserve Bank of India’s recent moves to slash the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements of bank, alongside a reduction in the repo rate, would lead to a considerable improvement in liquidity situation. The inter-bank call money rate has already dropped to 6.8 per cent as a result of these actions.

At the same time, he acknowledged that it was not enough to merely infuse of liquidity into the system. The additional liquidity has to translate into actual credit. Banks are being “encouraged” to provide liquidity to ensure that there is no disruption in economic activity.

Already, “suitable advisories” have been issued by the RBI and the Ministry of Finance to the banks to ensure that the borrowers are provided adequate credit, including export credit and working capital. Banks must also provide adequate funds in the form of investment or credit to mutual funds and NBFCs who, in turn, lend to industry, trade and business.

“Both the RBI and the Government are carefully monitoring the flow of credit…We will not hesitate to do more if needed”, Dr Singh added.

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