The impact of global financial crisis on India is stronger than expected but it will be the first to recover The challenge before the central bank was to ensure a balance between inflation and growth. While the inflation rate was falling in the last three weeks, there was a moderation in growth. The RBI had shifted its monitory policy stance and adjusted the rates in the last two months. The Wholesale Price Index and the Consumer Price Index need to be watched. The apex bank initiated measures to maintain a comfortable liquidity of rupee and foreign exchange, besides ensuring continuous credit flow to productive sectors, exports and small and medium enterprises (SMEs). “I think the measures taken by the Government and the RBI have resulted in positive outcomes.” Asked as to why some private banks were not reducing their lending rates, Mr. Subbarao said the central bank could only signal policy rates, but it could not issue mandates to the banks on their rates. “Rate cut was not the only solution to stimulate demand, though important. The fiscal policy is an important instrument to stimulate demand. The Government and the RBI are doing whatever is appropriate and necessary,” he said. He said that the RBI initiated a number of measures to address the pressure on mutual funds and non-banking finance companies (NBFCs). A special window was opened to enable banks to access money for lending which was of the order of Rs. 60,000 crore.
Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government has proposed a $150-billion bailout package in tax cuts. The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government also takes steps to help the private sector come out of the crisis.
The bust has claimed high profile investment banks like Bear Sterns (taken over by J P Morgan with dollops of help from the US Federal reserve, the US equivalent of Reserve Bank of India), Lehman Brothers (filed for bankruptcy on September 15 leading to the global turmoil since then) and, one of the most venerable insurers in the world, the American International Group (taken over by the US government for about $85 billion). Today, the US government led by Treasury Secretary (US equivalent of India's finance minister) Henry Paulson (himself an ex-Goldman Sachs CEO, another investment bank facing the music) is planning to make provisions for an $800 bailout package that would buy all the bad loans and related products sold by US commercial and investment banks. This arrangement, it is believed, will help the current credit crisis blow over without damaging the confidence of banks, financial institutions and ordinary people like you and me in the US.
And since most of the US companies do business in India and with companies in India and the world over, the bailout will help restore the global confidence in financial systems like commercial and investment banks. However, for the next two years the whole world, including India, is expected to reel under the effect of the current financial crisis considered as the worst since the Great Depression of 1929.
This is how it will affect us in India.