Opportunity Knocks If We React Quickly Enough!

Opportunity Knocks If We React Quickly Enough!


India has a mere twelve per cent exposure to the export market: software, back-office customer support and Business Process Outsourcing (BPO) services, diamond polishing and re-export, auto parts, engineered goods, other exports, iron ore, grain, sundry commodities and, its people, both skilled and unskilled. This is despite our best efforts to date, and not by design. Our impact on world trade is around 1 per cent. That is why our inward remittances from Indians working abroad rival our export figures.


But, as things stand in the global economy, our currently low dependence on exports puts India in a unique pole position and affords a great opportunity to benefit from the present situation.


Because India runs overwhelmingly on its internal growth drivers, and even as the global financial markets are melting down, Finance Minister P Chidambaram, blithely ignoring the 500 and 700 point daily drops in the Sensex, says he still expects to restore a 9 per cent Gross Domestic Product(GDP) growth rate in fiscal 2009.


Mr. Chidambaram is backed up by the Planning Commission’s Mr. Montek Singh Ahluwalia, who still expects us to post an 8 per cent GDP growth in fiscal 2008 and suggests the stopped Foreign institutional Investment (FII) flows will resume after a couple of months.


Commerce Minister Kamal Nath also supports the view that our economy is doing well, citing revived manufacturing statistics, export statistics, investment statistics and particularly, a 124 per cent rise in Foreign Direct Investment (FDI); the last most welcome, because this money goes into the ground to create new factories, facilities and jobs.


The Prime Minister too is hinting at imminent change, saying that the Reserve Bank(RBI) is watching the liquidity situation very carefully.


When all the economists in the government, including Mr. Subbarao at the RBI, and Mr. Bhave at the Securities and Exchange Board (SEBI), keen on facilitating liquidity, one might be forgiven for reading the pronouncements as intended and rapid unmuzzling of the Indian economy, after a year spent obsessed with inflation. It looks like our economic managers are hinting at reducing some of the highest lending rates in the world, sooner rather than later, given the understandable drying up of foreign fund flows.


If India indeed cuts RBI regulated lending rates aggressively, for once as a pre-emptive measure, the country could benefit immensely. If the RBI cuts rates in a motivated, planned, monitored, and phased manner, say every six weeks, inclusive of the Repurchase Agreements (Repo), the Reverse Repo, and the Prime Lending Rate; and further cuts the Cash Reserve Ratio(CRR) of banks, say, once every quarter for the next year; we could see spectacular results in reaction.


After all, even with four further half percent cuts in the CRR, Indian banks would still be capitalised higher than everywhere else, albeit lower than the current 10 to 13.65 per cent. This conservatism with Cash Reserve Ratios is welcome in these uncertain times, and in any case, our lending processes are rigorous, and loans go only to the most deserving candidates. But, all in all, all these actions, taken together, would inject very badly needed liquidity into parched business and industry.


If undertaken, it will deliver a dramatic jump-start to our artificially suppressed economy, get our infrastructure projects surging forward, and get all our business and industry motors humming again. We will suffer a little consequent inflation perhaps, from consumerism, with cheaper money oiling the wheels, but not much, because it will be offset by decelerating oil prices and enhanced growth in the near term.


What we would also gain, by way of contrast, if nothing else, is a star economy in a sea of troubled ones. At present, in the celebrated BRIC, only Brazil is weathering the storm well. Russia is down with oil, and China is afflicted by US weakness. And that leaves us.


In fact, the contrast between the somewhat devalued trillion dollar Indian economy and the battered 3.5 trillion Chinese economy, is in the ways the two are structured. A full third of the Chinese economy is dependent on exports and another third on contract manufacturing for entities abroad, mainly US companies.


Similar, or even higher figures obtain for Japan, South Korea, Indonesia, Malaysia—all with their economies heavily dependent on US purchasing.


Singapore, a large, Canary Wharf-like Asian office block for the West, ditto Hong Kong, if you ignore the looming mainland, and beleaguered, tourism dependent Thailand, are also in trouble and largely helpless in the near term.


Other Asian economies such as Vietnam, Cambodia, Myanmar, tiny Brunei and even Australia, do not figure as emerging markets that can yield bumper profits for anyone. Australia has grown dependent on the Chinese and Japanese, both down themselves, in lieu of the distant and now recession hit Europeans. Myanmar, with considerable potential, is, sadly, locked away in its own time-warp.


SAARC Economies such as Pakistan, Nepal, Sri Lanka and Bangladesh, in our immediate neighbourhood, are slight, and bedevilled by long term weaknesses and deep political instability.


This is the time therefore for India to be bold. It has every reason to pump-prime its economy now, when our problems are few in comparison, and when almost every other country is falling hard. We are down in sympathy, no more. If we can successfully demonstrate that our domestic economy alone can retain growth rates of 9 per cent, even without foreign fund flows, we will paradoxically, and inevitably, attract massive foreign investment, both as FDI and FII.


Not everyone is currently penniless abroad. The Sovereign Funds of the oil rich nations have very few decent investment options in the near term. Our relaxation of Participatory Notes norms should be accompanied by a Ministry of Commerce initiative to attract such monies. We should not make the perennial mistake of always and exclusively looking West in all seasons, even for External Commercial Borrowing (ECB) operations, also recently opened up again.


Our bourses have fallen to below 50 per cent of peak levels in the face of an FII and Hedge Fund withdrawal of a mere USD 10 billion since we learned of the sub-prime crisis. Just one Sovereign Fund from the Gulf could set such an amount right! It is, after all a win-win situation for both. We could, if we seize the moment, become the best performing economy and market in the world, circa 2009.

(1.050 words)

October 8th, 2008
Gautam Mukherjee