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Crisis will be severe, Singh says
India's Prime Minister Manmohan Singh told company chiefs that the global financial crisis is worse than expected and is hurting growth, assuring them of government support to tide over its effects.
- Bloomberg
- Published: 00:23 November 4, 2008
New Delhi: India's Prime Minister Manmohan Singh told company chiefs that the global financial crisis is worse than expected and is hurting growth, assuring them of government support to tide over its effects.
"The financial crisis has exacerbated a global downturn that was expected earlier but is now likely to be more severe and prolonged," Singh told chief executive officers in New Delhi on Monday. "A crisis of this magnitude was bound to affect our economy and it has."
India's central bank on November 1, for the first time since 1997, deployed all three of its main tools to shore up growth after interbank lending rates climbed to 21 per cent.
Singh had on October 20 asked the nation to prepare for a "temporary slowdown" of the world's second-fastest-growing major economy.
Singh expects growth at 8 per cent this year, Commerce Secretary G.K. Pillai said. That compares with the Reserve Bank of India's forecast for 7.5 to 8 per cent in the year to March 31.
The central bank lowered its repurchase rate to 7.5 per cent from 8 per cent, reduced the amount of deposits that lenders need to set aside as reserves to 5.5 percent from 6.5 per cent, and cut the amount of money lenders are required to keep in government bonds to 24 per cent from 25 per cent.
The prime minister will set up a panel to address issues raised by industry and arising from the crisis, Trade Minister Kamal Nath said in New Delhi after the meeting.
Those in the panel will include Finance Minister P. Chidambaram, Nath and Planning Commission Deputy Chairman Montek Singh Ahluwalia, DLF Ltd. Chairman K.P. Singh said following the meeting.
Companies sought deeper cuts in interest rates and the amount of money that banks need to set aside as reserves to improve the availability of cash.
Reasonable rates
The Federation of Indian Chambers of Commerce & Industry, a lobby group, asked for a reduction in the cash reserve ratio to 4.5 per cent from 5.5 per cent and a cut in the key interest rate to 5 per cent.
"Insolvency shouldn't be visiting all businesses and industry as a whole and hence the issue of general risk aversion in our banks has to be solved," Rajeev Chandrasekhar, president of the federation, said in comments issued before the meeting with Singh.
The infusion of cash from measures taken "will help to provide credit at reasonable rates", Singh said. "The public sector banks have been instructed to ensure that they act counter-cyclically in this situation to counter the general erosion of confidence."
Singh said the Reserve Bank and the government have been able to take the measures they have because anti-inflation steps have succeeded.
"We are able to act more boldly because our efforts to contain inflation have begun to be effective," Singh said. Movements in the Wholesale Price Index "over the past six weeks suggest a definite abatement of inflationary process".
Domestic consumption
India's inflation rate fell below 11 per cent for the first time since May, to 10.68 per cent in the week to October 18 from a year earlier after gaining 11.07 per cent in the previous week, the commerce ministry said October 30
Asia's third-biggest economy is powered mainly by consumption from its 50-million-strong middle class, insulating it from a decline in overseas demand.
The nation's trade as a percentage of gross domestic product is 32.5 per cent, about half that of China and the European Union, according to the Asian Development Bank.
"The Indian economy is a domestic-consumption, investment- driven economy," Chidambaram said on October 31. "Exports play a significant role, but not as much as they do in China."
India's exports grew at the slowest pace in 18 months in September as the weakening global economy damped demand.
Overseas shipments rose 10 per cent to $13.7 billion from a year earlier, after gaining 27 per cent in August, the government said in New Delhi yesterday. Imports increased 43 per cent to $24.4 billion, widening the trade deficit to $10.6 billion.
Singh reiterated that India's banks are well-capitalised and that there should be no concern over the safety of deposits, while pledging the government's support for the industry.
Increased spending on infrastructure will help shore up economic growth.
Infrastructure
"We will review projects and programs in the area of infrastructure development, including both pure public-sector projects and public-private partnership projects, to ensure that their implementation is expedited and they do not suffer from constraints of funds," Singh said.
This spending, along with increased outlays on health, education, rural areas and farm development, will help maintain growth and economic stability, Singh said. Singh urged companies not to cut jobs.
"While every effort needs to be made to cut costs and raise productivity, I hope there will be no knee-jerk reaction such as large-scale lay-offs which may lead to a negative spiral," Singh said.
The government will take all domestic monetary and fiscal policy measures to protect growth rates, Singh said.
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