MONETISING FISCAL DEFICIT
The full blown effect of the global slow down has not been felt by us as yet. There have been wage frezeeses, holding up recruitments, lay offs etc across a spectrum of industries but except perhaps the auto industry, and Textile Industry there is no demand recession. FMCG Companies are also not complaining because it is this segment which acts as a barometer for the fall in capacity to purchase. Some of these companies have targeted rural customers hitherto ignored following the Prahlad's theory of selling to the bottom of the pyramid profitably. Yet many of us fear the doom's day is not over yet. Venu Srinivasan one of the shapest brains in Indian Industry has expressed his concern for the economic slow down which shows no sign of reversal despite certain measures initiated by the Government to stimulate demand. He has made a suggestion. Instead of piecemeal stimulus packages the benefit of most of which always accrues to Government being the biggest spender to consider monetising the huge fiscal deficit by borrowing from RBI- simply put by minting more currency. This could naturally bring down the value of money with attendant inflation but the monetary system will have liquidity to lend to willing borrowers so that the slackness will be removed. But the other problem of sagging demand for industrial goods will remain. Assuming the industry gets higher access to credit, that will lead to more capacity creation/utilisation which may or may not be absorbed by the market. That willlead to piling up of inventories as it happened in Auto sector who are forced to cut down production schedules. This has happened to Ashok Leyland, Tata Motors and even TVS Motors. The basic problem is to boost demand. This will be possible with huge public investment by government in Infra structure which will create economic activity enabling those who work to have a higher disposable income. Montek Singh Ahuluwalia talked about using a portion of our Forex reserves lying invested in US Treasuries for a meagrely return of 2% in infra structure as Chinese did. Chidambaram found a circutious way of putting forex reserves to work . He announced a SPV which will be funded by RBI to help Industry avail Forex loans. Instead, Forex Reserves could be directly used in Public investments. Monetising deficit could increase money supply but targeted section may not get access to increased money supply without effective public investment.
Some time in the past, Public Sector BHEL faced a recession in demand. that gave a remarkable business idea - Boiler life extension plans. BHEL undertook to extend life of exisitng power boilers for nominal cost so that people who needed to have capital goods got them at cheaper prices by some add on facility or re engineering. They grabbed orders for smaller boilers below 50TPH also across spectrum of Industries and beat recession effectively. Such out of the box solutions have to be found by the industry to create demand. Co generation boilers were another idea sold to Sugar mills for generating wealth from waste- Bagassee. Bagassee is used as a source for producing news print by Tamil Nadu News Print. Sales of pre owned cars was another idea by Jagdish Khattar when Maruti faced demand recession. Only such ideas will help the industry to create demand. In olden days, IDBI used to offer refinance facility for capital goods industry to boost demand. Industry needs to think on such lines to fight recession.
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