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Will he hold recession at bay?

Ranabir Ray Choudhury

When the Prime Minister said the other day that he would ask West Asian countries to make their surplus cash available for investment in India, he was actually giving notice of the core problem afflicting not merely India but the world economy at large at the present juncture. A general funds shortage has pushed up interest rates worldwide, which has led to a slowing down of economic activity everywhere, the need of the hour being a stiff infusion of funds to get things mo ving again.

This is why the Governments of developed countries have set aside a huge corpus of investible funds, the foremost objective being to prevent financial institutions from going under and, secondly, to instill confidence in the minds of important economic players that the present downturn will end shortly.

Looking at the Indian economy, this is precisely the reason why the RBI has loosened the financial strings and made available to banks substantial investible funds which would not only look after the critical shortage of money plaguing the wheels of production and services (working capital, etc) but would also ultimately lead to a reduction of the cost of loans which would make investments (ongoing and pending) somewhat easier to go through.

The problem here is that the scale of funds required is nowhere near what has been made additionally available through recent measures such as reducing repo rates, CRR and SLR, which probably explains why reports of production cuts in nearly every major sector are now coming in like a flood. Companies are working overtime to reduce costs so that working capital requirements are controlled, not to speak of the steps already taken to reduce the wage cost by clamping down on bonus, loyalty incentives, etc, and even laying off employees. When managements take steps like these, they are actually looking ahead and preparing for tougher times tomorrow and the day after, the inference being that, despite all that the Government has to say on the subject, the outlook remains bleak.

Indeed, what has made the task of the UPA Government even tougher is the outgo of funds on populist measures like the massive farm-loan write-off announced in the 2008-09 Budget, a measure that was taken solely with an eye on the Lok Sabha elections to be held in the course of the current financial year, or in April-May next year. At the time, the Finance Ministry patted itself on the back for having being able to set aside funds (to the extent of Rs 60,000 crore) for the purpose, little realising that matters would turn out differently as the year progressed for wholly extraneous reasons.

The result is that the Government cannot set aside funds now from its budgetary resources to get dormant and planned projects going on a scale large enough to make a sizable impact on the general economic situation. As it is, even before the crisis has really got its teeth into the ‘real’ economy, the Government has conceded that the fiscal deficit target for the year is likely to be exceeded, the message being that the mandatory stipulation of the Fiscal Responsibility and Budget Management Act will not be met at the end of the year. Even so, there is no alternative but to pump in money, posing a dilemma which will be difficult to tackle.

Dr Manmohan Singh, a respected economist himself, is well aware of the funds problem, which explains why he has been focussing on the issue right from the time the bubble burst in September. At the Asem meeting in Beijing late October, one of the points he made was that multilateral institutions such as the IMF and the World Bank should step in with larger resources to invest in big infrastructure projects in developing countries. There has also been a specific suggestion that the IMF should increasingly lend to meet development targets instead of primarily focussing on balance of payments requirements, thereby effectively complementing the job of the World Bank. His stand on the utilisation of surplus funds in West Asia should also be seen in the same light.

Clearly, any change in the role of the IMF and a fine-tuning of the obligations of the World Bank will have to be discussed by the membership of the two institutions, a process which hopefully will begin at the forthcoming Washington meeting convened by President Bush.

What this means is that any big infusion of funds from the Fund and the Bank will take place only in the future leaving the problem at hand unaffected. It is also more than likely that the suggestion to West Asian countries on utilisation of their surplus funds will take time to produce results, if at all. Even if there is a positive response, the quantum of the fund established may not be adequate to meet immediate requirements.

What this means basically is that the UPA Government will have to look at domestic resources to inject demand into the economic system, and on a scale which will produce results. The stark fact is that there is no money in such quantities around to meet this requirement except of course the foreign exchange reserves, which are now in excess of $250 billion. Can a minuscule part of the reserves be used to pump up internal demand, the money being returned with interest over a period of time? If there are legal barriers to such a course of action, amendments could be introduced to the relevant Acts to remove them. This, in fact, is not a new suggestion and, if one remembers, it led to some debate before the proposal was shot down by the Government of the day some years back.

But even here there is a problem because merely pumping funds into the domestic economy will not be enough to get over the hump if the international environment is not conducive to growth. A fifth of the GDP is reliant on exports, the inference being that if the export environment is not helpful, its contribution to internal economic health will be stunted. Even so, the remaining four-fifths cannot be ignored and it would be a feather in the cap of Dr Manmohan Singh if he can hold recession at bay in this large part of the economy.

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