The Hindu Business Line : Time for booster shots

From Sri Lanka to Sweden, policymakers are using interest rate cuts and other measures as booster shots. The Finance Ministry and the RBI should take a leaf from them.

On Friday afternoon, the Finance Minister, Mr P. Chidambaram assured the nation that the liquidity problem was being addressed by the Reserve Bank of India (RBI) that had cut the cash reserve ratio (CRR) once again to 7.50 per cent, releasing Rs. 60,000 crore into the system. The government too was arranging further liquidity through supplementary grants from Parliament by October 20. His words were meant to comfort the nation that the policymakers were clued onto the cris is. But what exactly is the problem?

For a start, it must be understood that the RBI has merely returned to the market the funds it sucked out through four successive CRR hikes between April and July this year. If the present crisis of confidence in the West continues, leading more FIIs to pack their bags for home, the liquidity crunch will worsen. But more perniciously, the flight of capital from the equity market coincides with the prevailing high cost of capital for the real economy at home. Capital in general, is getting scarce and expensive. That is the real basis of an evolving downstream crisis, evidence of which is slowly but surely accumulating. The most important sign comes from industrial output whose year-on-year expansion has been steadily declining. The Finance Minister is right to doubt the veracity of a niggardly 1.3 per cent growth in manufacturing for August compared to 7.4 per cent the previous month and 10.9 per cent in August 2007. But he did admit to a decline and that should be enough for policymakers to get worried. At any other time, the complacency of policymakers presiding over the fastest growing economy after China may have been justified. But the world is a dangerous place right now and gloom is pervading. A Sensex in freefall upsets resource raising capabilities and other strategic economic plans. And when the slide appears inexorable, mere comforting words are inadequate.

From Sri Lanka to Sweden, policymakers are using interest rate cuts and other measures as booster shots. The Finance Ministry and the RBI should take a leaf from them and do the same for an economy that is showing signs of weariness burdened by high interest rates and falling consumer demand at home, and closing time in global finance markets. To maintain even the pegged down GDP growth of 7 per cent, output and consumer spending need to revive in tandem once again just as major policy lapses need correction. Fiscal and monetary stimuli through lending rate and excise duty cuts, easier FDI norms in vital sectors, yes, even retail, would boost investment and consumer demand. Pushing through key pending legislations in Parliament would help immensely. Nothing less will do.

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