SLOWDOWN IN INDIAN ECONOMY; MEASURES TO CHECK

The slowdown in economy is a global phenomena. The reasons causing it may have more similarity across the board but the remedy has to be different and distinct to each country’s economy due its own peculiarity. Therefore this article would be restricted to the measures needed to check slowdown in Indian economy. I am not an economist but do have grasp of basics of economics. It is open to the economists of the country to go into details of knitty-gritty of this problem but one thing is clear in my mind that this issue should be understood by a common educated Indian citizen.

Before we proceed further it is worthwhile to know few peculiarities of Indian economy. The GDP of India is 85% dependent on domestic production and 15% on export. The share of service sector has been increasing for the last two decades while the share of industry & agriculture sector in GDP has been decreasing. At present the service sector accounts for 50% of GDP while industry & agriculture sector accounts for 25% of GDP each. The growth in service sector has been very fast as compared to growth in agriculture sector though the 58% of population is still agriculture based society. Further, the BPO( business process outsourcing) sector growth has been more than 50% on year to year basis which is highly imbalance as compared to growth in other sectors with in the service sector.

The inflation had risen to the range of 11-12% till the second quarter of 2008 then it has cooled down to below 1% and even to Pt 18% by the mid of Apr 2009. It has been clearly the sign of over heated Indian economy. The Indian rupee was valued as low as Rs 39 per USD before rising to Rs 51 per USD. When the USD was at its low that time US did not restrict the outsourcing in the service sector but the moment it has become strong the laws are enacted to discourage the outsourcing in the service sector, particularly IT industry. All these indicators points toward a over heated & over rated Indian economy heading towards slowdown.

The targeted growth rate of GDP in 2010-11 was 10% but it was as low as 4.8% in Sep 08. The Central Bank in India now expects it to be around 6.0% in 2009-10 due to global cues. The strain of slow down in global economies on Indian economy has been very evident and the earliest indicator was reflected in the sharp downfall of sensex. Thereafter there were signs of less demands in automobiles & industry sector, shortfall in jobs requirements, job cuts in IT and BPO sector, delay of payments in international markets from developed economies & US particularly in IT sector, Liquidity crunch in Indian market etc. Though it is a fact that GDP of India is largely dependent on domestic markets but it would be incorrect to assume that liquidity crunch in the international market will not affect Indian economy adversely at home.

The unorganized sector in India is facing acute unemployment problems due to drastic reduction of demand in international market like diamond cutting, jewellery and leather industry etc. Even the organized sector like automobile, petrochemicals, steels, cements, airlines and hospitality have faced acute job shortages and there has been sharp cuts in the work force in these sectors. As an estimation , the organized sector has lesser jobs by 30% as compared to the demands during the corresponding period of last year. The share market all over the world has been a bloodied field with the shaken confidence of investors. The Indian share market has been a lucrative destination for gain by the Foreign Institutional Investors due to prevailing less lending interest rates in the developed countries till the recent collapse. The sudden sale of shares by FII en- block in very short span of time had led to huge loss of money by a common investor and the Indian share market had come to the floor. This indicates that more effective checks are required to be enforced by SEBI on the FII and Foreign Direct Investments(FDI).

The diagnostic symptoms of slowed down economy would also lead to the measures to be adopted for cure . This problem is needed to be addressed on two fronts. One is to stimulate demands in the Indian market through government investments which is like giving oxygen to the patient. The other is to increase liquidity in the Indian market which will increase the demands for production, increase in requirements of work force and reduction in job cuts which can be accelerated with the cuts in duty and taxes. It is needless to say that none of these two measures would be effective in isolation to sustain the Indian economy and therefore the combination of these two types of measures in concurrent manner intermittently would be needed to revamp the Indian economy.

In order to stimulate the demand in Indian market, RBI had included 20000 crore rupees in Dec 08 and had further raised rupees 3 lakh crore liquidity in the market through cuts in rates. The banks & non-banking financial companies were made available 75000 crore and state govts were allowed additional market borrowing of rupees 30000 crore. To address the liquidity crunch in the Indian economy RBI had announced the cuts in the Repo rates and Reverse Repo rates and brought it down to 3.25% & 4.75% respectively. The cash reserve ratio (CRR) was also brought down to 5% and interest rates on borrowings were reduced which was made possible due to the less rate of inflation.

These measures would definitely increase the fiscal deficit as compared to the planned targets but all these steps are undoubtly the right one taken at the right time. Though after the formation of new govt at centre we may find all types of hue & cry in Indian news media if the present govt is replaced by other political parties but these steps were utmost essential to sustain the Indian economy onslaught inflicted by global slow down .Keeping in view the decline in investments through FII , govt has rightly allowed 100% FDI on the automatic route though this measure will have its own constraint for being effective due to liquidity problems with banks in other developed countries.

I am of the opinion that SEBI should constitute one more system of checks & balances where the trading price of a share is regulated based on their book value as well as earnings per share in the previous quarter and the trading prices should not be allowed to go beyond a predetermined P/E ratio. This P/E ratio should be calculated sector-wise with regards to prevailing P/E ratios in other derivative markets. The witnessed loss of money in Indian share market is catastrophic considering the fact that in India 27 % of population still lives below poverty line and the indicator for being above poverty line is only earning of Rs 10 per day per person or Rs 3650 per year for a person.

The 70 % of US economy depends on the consumer spending and US itself accounts for 25 % of GDP of world. That’s why the boost in consumer spending in US which is possible only after restoration of consumer’s confidence will not only effectively check the slow down in US economy by generation of demands interalia production interalia job requirements but would also play a important role in bringing the other country’s economy on path of growth like the much needed oxygen. It would be the responsibility of the concerned govts to pump in govt investments in the market to create liquidity & demand in the market till the market becomes self sustainable. Similarly it is equally important for the second and third world countries like India, China, Mexico etc to pump in stimulants in the market so that their economy does not bleed to death by the time much needed oxygen is supplied by US economy on its recovery from the economic slowdown.