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BUSINESS
Stern Govt steps needed to come out of financial crisis
By
Devajit Mahanta
The global financial crisis has now hit the ‘bottom billion’, the
human capital – who have only seen gains from globalization; they are now
feeling its reverse. Industrial houses, as a result of the financial
crisis, have resorted to large-scale staff lay-off. But price cut, rather
than production cut or staff layoffs, would be a better option to tackle
this demand slowdown in the economy. Though by cutting prices a company’s
profit and loss account will take a hit, it will, however, help to keep
with them their loyal employees. The Finance Minister had even assured the
business community that if any sector faces special problems, the
government is open to examine their suggestion for excise duty cuts. The
Government had already cut excise duty and brought this down from 16 to 14
percent to stimulate the domestic economy, which is affected by downturn of
the world economy.
The global crunch has affected the Indian economy in three ways. First, the
capital: Foreign fund inflow is the key to India’s GDP growth rather than
the domestic consumption. India
had already witnessed some capital outflows as the foreign institutional
investors (FIIs) are facing redemption pressure.
The fact that the foreign currency debt inflow was as high as 38% of the
total, it is going to dry up with the global credit freeze in progress. We
are already seeing the foreign institutional investors’ portfolio equity
inflow turning into outflow in the last few months, pulling the Sensex
below the psychological 10000 marks. To compensate that, the Government
should approach the World Bank to substantially increase development
assistance to India.
Secondly, the dive in commodity prices: India still relies on
commodities for its foreign exchange and tax revenues. The fall in
commodity prices has further put pressure on export earning, especially on
textile industries. The shrinking global and domestic demand and a
crippling cash crunch have resulted in negative growth in the Indian
textile industries (about 30-35 percent in volume terms) and also resulted
in 7 lakh people losing their job so far.
Thirdly, labour: India
lost 500,000 export jobs in the last quarter of 2008 due to the fall in
world trade. With the world in its deepest recession since the 1930’s, the
misery of unemployment ones has raises the big question originally posed
during the ‘Great Depression’ – “What should the government do?” The
government, which has hired foreign experts in their advisory council for
the relevant approach to this crisis, has pumped in more liquidity in the
banking system, decreased interest rates, lowered REPO rate and made tall
statements of strong fundamentals. But the Indian financial system was
never cash strapped and banks were growing well.
The government should have instead worked keeping the uncertainty of income
and job in mind. The market is suffering from deficiency of demand rather
than liquidity and therefore raising liquidity in the system is not the
remedy.
The government is not taking the right step as it does not know or
acknowledge the problem in its reality. It is now for the government to be
alive to the situation and take measures in association with the RBI from
time to time. The big industries should also fulfill their share of
responsibilities and ensure that the measures taken by Government are
effective.
The most important challenge faced by the government now is to ensure a
balance between inflation and growth and also take correct decision and
change the established fiscal and monetary policies. Though the impact of
global meltdown on India
is stronger than expected, every dark cloud has a silver lining. With stern
steps by the government in the right direction, we should soon come out of
this crisis without much damage.
Readers can send their feedback at devajitmahanta@gmail.com
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