Experts caution Indian policymakers against ‘denial mode’

October 10th, 2008 - 5:36 pm ICT by IANS  

New Delhi, Oct 10 (IANS) Grappling with severe liquidity crunch, India’s economic woes escalated Friday with industrial growth slipping to 1.3 percent and inflation moderating only slightly to 11.8 percent, even as experts cautioned against complacency while key policymakers maintained that the country’s fundamentals remained strong.”Our policymakers seem to be in a denial mode,” said noted business economist D.H. Pai Panandikar, while referring to Finance Minister P. Chidambaram’s statement Friday that the main problem in the Indian financial system was liquidity.

“Yes, liquidity is a problem and I am glad the finance minister also says so. But the markets have crashed, the rupee is sliding, there is a global turmoil and inflation remains high. All this could affect out growth,” Panandikar, who is president of RPG Foundation, a think tank, told IANS.

His comments came against the backdrop of a steep drop in a key Indian market index and a subsequent statement to placate sentiments by the finance minister who said the impact of the financial storm on the Indian economy was not as deep as feared by some sections of the investing public.

“We have identified that the main problem is liquidity,” Chidambaram said in a statement early Friday, adding: “There are many indicators which affirm the sound fundamentals.”

He said the cut in cash reserve ratio (CRR) by the Reserve Bank of India (RBI) by 50 basis points Monday and another 100 basis points Friday were steps in the right direction to address the liquidity problem.

Even as his statement was being read out by Finance Secretary Arun Ramanathan, came another gloomy news that the growth of India’s index for industrial production was a mere 1.3 percent in August, which added to the worries of apex industry chambers.

“There is a need to reduce the repo rate (the rate at which central bank lends to banks) by 150 basis points at this juncture to attract liquidity inflows,” said Federation of Indian Chambers of Commerce and Industry (Ficci) in a statement.

“Measures like cut in CRR were long over due,” added Sajjan Jindal, president of the Associated Chambers of Commerce and Industry (Assocham), another leading industry lobby.

“RBI should also reduce the benchmark-lending rate (currently at 9 percent) to ensure adequate liquidity in the system. Otherwise infrastructure projects will be severely affected,” he added.

Panandikar feared that even an eight percent growth rate, as opposed to an average of over nine percent in the past three years, may become a difficult proposition if there was no effective softening in the global and domestic capital market.

“A lot will depend upon how the capital markets behave in the future not only in India, but outside as well. Around eight percent growth will also depends upon how and when the capital market smoothens.”

Amid this global mayhem, Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council (EAC), also cautioned against any further tightening of money supply.

“Inflation has stabilised. The government should stay alert as to how the world’s top economies behave to minimise the raging volatility in the financial market,” he told IANS.

“RBI must keep watch on the market trends. Though Indian financial market’s exposure is much less, any complacency will be bad.”

The finance minister, who was Wednesday authorised by the Union cabinet to take necessary steps to help the country tide over the financial crisis, also announced a high-level group to look into the liquidity requirements following the mayhem in the capital market.

“Credit is the lifeline of trade and business, hence, it is important that credit continues to flow to all sectors of the economy,” said Chidambaram, adding that Ramanathan will head the expert panel, which will give its report within a week’s time.

“It is important to maintain our confidence in the Indian economy.”

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