India cannot remain immune to global meltdown: Economic advisor

October 7th, 2008 - 4:16 pm ICT by IANS  

Lehman BrothersNew Delhi, Oct 7 (IANS) India cannot remain immune to meltdown in developed economies, a top economic advisor to the government has warned.“We cannot remain immune in the event of a major meltdown of the OECD economies, which at the moment appears to be an unlikely proposition,” Arvind Virmani, chief economic advisor (CEA) in the finance ministry, told IANS, referring specifically to the US, the UK, Spain, Switzerland, France, Germany, Italy and Australia.

These nations are eight of the 30-member Organisation for Economic Co-operation and Development (OECD), which follows the principles of representative democracy and free-market economy.

Some, like the US, the UK, Germany and Australia are key investors in India.

For instance, the US is India’s largest trade partner and foremost export destination, accounting for nearly 17 percent of India’s exports.

Will the global financial meltdown - as reflected by the collapse of Lehman Brothers and American International Group, which has forced the White House to pledge a $700-billion bailout package - have any long-term impact on the Indian economy?

Virmani, who did his Ph.D in Economics from Harvard University under the supervision of Nobel Laureate Kenneth Arrow, answered cautiously but did not rule out the possibility of a global meltdown impacting the third largest Asian economy after China and Japan.

“It depends upon how the governments of OECD countries handle the crisis. If they are able to manage it, then the answer is, ‘No’,” said Virmani.

Prime Minister Manmohan Singh during his just concluded visit to France had told French daily Le Figaro that India was not immune to global financial upheavals.

“We live in an interdependent world and the fate of all countries is related to the international financial system. Our value markets are open to the world and if they are affected, this will affect our capacity to finance our development,” Singh had told the paper.

As Singh’s apprehension left Indian securities markets reeling, Finance Minister P. Chidambaram infused hope among investors, saying Oct 1 that Indian domestic market was “safe, sound and attractive, and there was nothing to worry”.

To boost the flow of liquidity in the market, India’s central bank - the Reserve Bank of India (RBI) - Monday cut cash reserve ratio (CRR) or the minimum deposit a bank has to keep with the central bank by 50 basis points to 8.5 percent, which will see Rs.20,000 crore or Rs.200 billion getting pumped into the system.

Amidst financial chaos, however, remains a silver lining as “India’s medium term growth potential remains 9 percent,” Virmani said.

“Yes, India’s medium term growth potential remains 9 percent despite the crisis in global financial market. However, we have to pay greater attention to policy and institutional reforms in the next six to nine months,” he said.

In 2005-6 and 2006-7, the Indian economy grew 9.6 percent and 9.4 percent, respectively, which was clearly above the trend.

But it logged a 7.9 percent growth in April-June of the current fiscal, as against 9.2 percent in the corresponding period last year.

The Prime Minister’s Economic Advisory Council has projected the economy to grow at 7.7 percent in the current fiscal. Between 2003-4 to 2007-8, the average growth rate of the economy has been 8.9 percent.

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