India to cope amid world sees longer, deeper recession:FM

[Sukumar.N]

Finance Minister P Chidambaram speaking on the effect of the current
global crisis on India said that there have been recessions in the
past but added that the current recession threatens to last longer and
deeper than before. He said that India does not have a problem but is
bearing the brunt of the spillover of this global recession.

Chidambaram said that 60-65% of India’s workforce depends on
agriculture and he expects a bumper crop this year and feels it will
continue to grow at a robust space.

Chidambaram is confident that India will see a good growth rate at the
end of this year and said that his lowest estimate of GDP is 7%.

“In the last sixty days both the government and the Reserve Bank of
India (RBI) have moved swiftly to take steps that will ensure adequate
liquidity is provided to industry. “ However, Chidambaram said that
providing liquidity is not the panacea for the current crisis.
“Providing liquidity is only the first step, the second is ensuring
appropriate price and the third step is ensuring that at that price
credit is actually delivered to industry.”

Here is a verbatim transcript of P Chidambaram’s speech on CNBC-TV18.
Also watch the accompanying video.

Tthe world economy has changed more rapidly in the last sixty days
than it has over a long time. But this is not the first time in which
industrialized countries are going into a recession. There have been
recessions in the past in Japan, in Europe and in the United States
(US).

This recession of course threatens to be a longer and deeper recession
affecting more industrialized countries. We in India are experiencing
the spillover effects of what is happening in the advanced countries.

We are not the cause of the problem but we are being invited to be
part of the solution to the problem.

The crisis will end some day. We must take note of the structure of
economy and the manner in which most Indians live and work.

Sectoral outlook:

About 60-65% of India’s population and workforce depend on agriculture
and agriculture continues to grow at a robust pace. The rabi crop is
the main agricultural crop in India. In terms of sown area of wheat;
we have already sown 2.69 million hectares as against last year’s 2.19
million hectares on the corresponding date. Maize stands at 2,32,000
hectares as against 1,77,000 hectare last year, jowar at 4.19 million
hectare as against 3.59 million hectares last year, pulses at 6.6
million hectares as against 5.5 million hectares last year, oilseeds
at 6.05 million hectares as against 4.34 million hectares last year.

The total sown area has increased very significantly this year. The
monsoon had been good, farmers are busy with their work, they do not
look at the Sensex or the Nifty everyday and we will have a
substantial bumper crop.

The services sector in India is driven by million of small and medium
enterprises. They are facing some liquidity problems but we are
determined to ensure that they have provided adequate liquidity so
that they can carry on their work and their business until we tide
over these crises.

The section that is affected is the industrial sector; especially
large manufacturing industry and the financial sector.

Newspapers are full of the problems faced by the financial sector and
industry because it is people from these sectors who are readers of
the newspapers and who advertise in the newspapers.

The media naturally focuses on the industry and the financial sector.
These sectors indeed face problems.

We are extremely vigilant; we have been proactive. Infact, in the last
sixty days both the government and the Reserve Bank of India (RBI)
have moved swiftly to take steps that will ensure adequate liquidity
is provided to industry.

But as I have said previously, liquidity alone is not enough.
Providing liquidity is only the first step, the second is ensuring
appropriate price and the third step is ensuring that at that price
credit is actually delivered to industry.

I think these are not insuperable problems, these are not
insurmountable problems. While the world output will decline and to
that extent affect our exports, affect some capital inflows, affect
external credits, we must be able to quickly substitute or compensate
for that by stimulating domestic demand and providing liquidity in the
domestic market.

The CMIE (Centre for Monitoring Indian Economy) captures data on
investments. They say that inflation, rising cost of capital and fears
of a global economic slowdown have not reduced the enthusiasm among
Indian corporates to set up fresh capacities or expand the existing
ones.

This is well captured in the data collected by CMIE.

We captured 557 new projects in the September 2008 quarter adding Rs
5,22,812 crore. This is the third largest quarterly investment
captured in India’s history. While, 557 new projects have been
captured in the quarter ending September 2008; 48 projects have been
completed in this quarter and CMIE also notes that 45 projects have
been shelved.

On GDP:

So I think what we need now is to deal with each problem as it arises.
Anticipate the problem, deal with it by using sound economic
principles and a certain amount of courage and confidence. While there
is a slowdown, what does a slowdown in India mean? The lowest estimate
of any think-tank in India is 7% growth. Why is 7% growth a matter for
wearing sackcloth and ashes? The world output will go by about 2% that
is still three times the world’s growth.

There will be a slowdown but the steps that we have taken and that we
will take can to a large extent compensate for the factors that are
causing the slowdown and I am confident that we will end this year
with a very satisfactory growth rate.

I cannot put a number on the final growth rate. IMF’s (International
Monetary Fund) estimate made last week places at 7.8% many analysts
have said between 7% and 7.5%. The RBI has said 7.5% to 8%. If anyone
can tell me that the worst is over for the world then I can
confidently predict what the growth rate will be. But let us assume
that for another month or two there will be further bad news; even
then we will grow at a satisfactory growth rate. Next year we will
bounce back to a much better growth rate.

What is required now is confidence, courage and taking the steps that
are necessary to compensate for the ill effects of a world
slowdown.

On Indian exports:

It is likely that our exports will dip and we may not reach the USD
200 billion but that was what I said last year as well but eventually
we reached the target last year. We will be close to the target this
year but we can compensate for that by stimulating domestic
consumption.

On capital flows:

We have already witnesses some outflows as a result of Foreign
Institutional Investors (FIIs) facing redemption pressures back home.
But we are compensating for that. The World Bank has promised to
substantially increase developmental assistance to India. We are
looking to multilateral regional banks for more funds to flow into
India and we have relaxed the conditions under which the Indian
industry can raise capital aboard both debt and equity. A number of
companies have in the last 10 days raised ECB abroad at very
attractive rates. So we can compensate for that by allowing our
companies to raise capital abroad.

On depreciating rupee:

The rupee has depreciated because the dollar has shown an
extraordinarily strong performance and so it’s ironical that money is
flowing back to the country where the crisis originated but that is
the complaint I have heard from every Finance Minister in the world.
There is pressure on the rupee. But once the flows reverse as we
believe it will, FCNR rates (Foreign Currency Non-Resident (Bank) {FCNR
(B)} account have been revised, ECBs have been liberalized. Once the
flows begin to come into India, it is quite possible that the rupee
will climb up.

At the moment there is a huge demand for dollar coming mainly from oil
companies and others who have to meet some payment obligations. It is
quite possible that in about a month or two the direction of flows can
reverse. FDI’s are still quite strong and the rupee will settle at an
appropriate level.

Sensex and Nifty:

I think what is important is not to be focused on the Sensex or the
Nifty everyday. If you look at that you suddenly feel you have become
poorer, you have not become poorer or richer. This is simply an index
which points to the estimate of investors of the potential of that
company or that sector in the future. That one number should not
determine all our actions. It should not determine what we have for
breakfast and it should not determine whether we go to the gym or not
or it should not determine whether we will take a walk in the park.

That is a number but there are many other numbers which I think will
make for the totality of India’s economy. Agriculture is robust and we
will ensure the services sector dominated largely by SME’s is provided
with adequate liquidity so that they can carry on with their business.
We will take steps to stimulate the domestic economy to compensate for
the downsides caused by a downturn in the world economy.

At the end of the year, you will find that India has returned a very
satisfactory decent growth rate given the world conditions and next
year I am confident we will bounce back.

N.Sukumar
Research Analyst
www.kences1.blogspot.com