Bail Out Package and Indian Economy

BAIL OUT PACKAGE AND INDIAN ECONOMY

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The economic problems of the global slowdown began to surface in India during the mid-2008 when a few major investment banks in the USA collapsed and the US economy began to feel the heat of the meltdown. After a phase of bullish euphoria in the financial markets in 2007, the Indian stock markets began to suffer heavy setbacks after January 2008. While the markets were hoping to recover to some extent at the time of Diwali, in October 2008, it turned out to be the other way around as the markets suffered major reverses. To add to the woos of the common man, the inflation rate was hitting the roof.      

In addition to the exorbitant price level, there was liquidity crunch in the market and the interest rates were very high, discouraging the investors from making any investment. The grim market scenario forced the investors to put on hold even the most viable projects. The banks were also shying away from funding the projects on one pretext or the other.

By October 2008, many companies, particularly in the IT and Aviation sectors, began to hand over pink slips to quite a few of their employees. New recruitments were stopped and in many cases the salaries of the existing staff were slashed. This was for the first time after the onset of the process of reforms that such a situation was encountered in the country. Despite the brave face put up by the government, the feeing of recession in the economy began to sink in.

As the crisis loomed large over the world economy, the US government took the lead to save its investment banks through a bail-out package. The US government also considered the bailout package for its three major automobile manufacturers. On the national front also, many corporate entities began to announce salary cuts and reduction in the employee strength, forcing the government to announce a package of unemployment doles for such employees. This was the time when the Indian government also tightened its belt and came out with an economic package which was multi-faceted and encompassed areas like indirect taxation, interest rate cuts, monetary policy measures and duty cuts.

Focus of the package announced on December 6, 2008, was primarily on reducing the prime lending rates of the commercial banks. The aim was to revive the economic activity by reviving the housing, infrastructure and automobile sectors. The government tried to increase the availability of liquidity in the market by adopting various monetary policy measures to trigger the downward trends in lending rates of various banks, including the house building advances and car loans. The first bailout package was estimated to have pumped in additional funds to the tune of Rs 40,000 crores into the Indian economy. The second bail out package, announced in the beginning of January, 2009, provided the system with additional liquidity to the extent of Rs 20,000 crore, taking the total additional fund availability to Rs 60,000 crores.

As an automatic corollary to the above mentioned measures was the resultant easier credit at reduced rates. With the RBI announcing reduction in the Repo Rate and the Bank Rates, most of the commercial banks reacted positively and announced reduction in their prime lending rates, making it easier for the borrowers to borrow at reduced rates. Hence, not only the availability of credit was enhanced, its cost was also reduced considerably.

Among the most important sectors is the automobile sector. During the last about one decade, this sector has been the backbone of India’s industrial growth rate. Reduction in the excise duties for most of the vehicles has helped this sector to cut the prices of the vehicles significantly, protecting it from further slide. Reduction in the petrol and diesel also helped the auto sector to tide over the difficult situation. The growth rate of the auto sector may not have improved greatly after these measures, but the measures have certainly helped this crucial sector to survive the global scare.

Civil aviation is yet another important sector that had been fuelling the growth rate of the country in the recent years. But after the rise in fuel prices and global slowdown, this sector came under immense stress. The government cut the prices of the aviation fuel three times during the months of December and January, bringing down the costs in the aviation sector drastically.

Effectiveness and Future

The measures taken by the government in India were timely and apt. Any other government under such a situation would have reacted in the similar manner.

Certain visible improvements have been observed in the Indian economy after the measures were initiated. The capital markets have stabilized even though at a lower level. The inflation rate, which had touched the figure of 12 per cent, has come down to a comfortable level of less than 6 per cent. Despite the projection of 1 to 2 per cent growth rate of the global economy, the Indian economy hopes to post 7 per cent growth during 2008-09, which would be among the highest in the world. It is expected that after the first quarter 2009-10 things would begin to improve and the economy would again be back on the path of rapid development.

One of the classical criticisms of the fiscal and monetary policy measures can be summed up in a proverbial expression that one can take the horse to water but cannot force it to drink. Government may provide a good environment for the investors but the investors may wait for the recession to be over before taking major investment decisions. In other words, the government may provide the framework of revival but the revival may actually take longer than expected. Further, the improvements in the global situation, particularly in the USA, would certainly play a major role to bring the situation back to normal.

Many people feel that the attempts to add liquidity in the economy were too tentative and too less. Rs 40,000 crore is just about one per cent of the GDP of the country. In a large and diverse economy like ours, this sum may have no significant meaning. It is also believed by many that the liquidity added by various measures was sucked in by the oil bond operations of the government and the net impact on the liquidity was virtually negligible.

The government has made clear its intention to encourage the private investment and step up the public expenditure to keep the economy buoyant. Mere statement of the intention to invest is not sufficient and higher investment must happen quickly and effectively and the routine delays in the government expenditure must be curbed. Infrastructure and social sector are two such areas in which the government agencies can push up the investment rate significantly. Programmes like the National Rural Employment Guarantee Scheme, Bharat Nirman, and Sarv Siksha Abhiyan are some of the programmes having a lot of funds for investment in the rural areas and, if implemented properly, these would keep the economy vibrant despite the global economic blues.

Housing is another important activity in India. There are many countries in the world that had grown rapidly by supporting their housing activities. With about 4 per cent increase in population in the cities, half of which is due to large scale migration from the villages to the cities, housing is going to be a basic need of the people in India. Affordable housing must be encouraged by the government to counter the situation of economic slowdown.

With a huge rural population base, the policy makers must ensure that the real incomes in the rural areas of the country continue to rise. With the economy offering a lot of scope for development and growth in the rural areas, increased income levels in the rural areas would generate demand on sustainable basis. Besides, a large chunk of the Indian population is still not adversely affected by negative growth of the Indian stock markets. In this way, India is different from rest of the world.