4 Point Solution…

Hi Guys, yesterday I was watching PM’s speech in Hindustan Times Leadership program. After his speech Mr. Amit Mitra, General Secretary of FICCI (Federation of Indian Chambers of Commerce & Industry) asked him 3 questions. Out of those 3 questions, first question was, how exactly in this financial crisis world is facing; India is going to achieve the 8% growth (that PM said in his speech before this question & answer session)? For this question PM Mr. Manmohan Singh’s answer was crystal clear that his government will not spare any public instruments like

1.Monetary Policies
2.Fiscal Policies
3.Foreign exchange Policies &
4.Public Infrastructure investments use all these to their fullest capacity.

For his clear strategy & vision or mission whatever you call, audience (including of all industry bigwigs, politicians & media persons) gave him a standing ovation!

What I think is we Indians must be lucky to have Mr. Manmohan Singh as Prime Minister and his team like Chidambaram, Sam Pitroda, & etc in this time of crisis. I don’t think we have such a QUALIKFIED, KNOWLEDGEABLE & EXPERIENCED (well handled the crisis of 1991 & 1997) economist cum politicians.

Now coming to today’s discussion or my posting is about how actually these 4 issues to be handled???

But before going into that, I would like make one point very clear is that, in any type crisis people tend to behave panicky. Common man will not think of rationality or logically may be 1929’s great depression, 1973’s oil shock, Harshad Mehta & Khetan Parekh’s stock market scams, 1997 South East Asian crisis or 2001 dotcom bubble burst. If people think rationally these crisis would not have happened or not with so much intensity! We all Indians know when ICICI bank’s rumour of exposure of Subprime crisis hit, each & every person withdrawn their money. Leave our country, its same with the so called developed country or Big brother, US! Couple of weeks back when Dow fell more than 700 points, some people withdrawn their deposits and literally buried it under the ground!!! So what Mr. Chidambaram is asking from investors (think rationally) is something simply impossible!

So starting with Monetary & Fiscal policies, I would like to start with very note on what is basic difference between both of these?

In simple terms monetary policy is the policy which decided by the Central Bank, RBI.

And fiscal policy is the policy which is decided by the Central governments.

Now starting with monetary policy, RBI has already infused almost Rs. 3000000000000 within one month or so by reducing CRR, repo & SLR as inflation is coming down. But still industry & markets are facing the heat of liquidity. Why? They still feel that the interest rates are quite high. Keynes said, in the crisis time best move from monetary side is make interest rates cheap as much as possible. But the present question RBI is facing is how much cheap? Since they need to monitor inflation also. But what I feel is RBI should go ahead with Keynesian strategy and reduce the interest rates on subsequent basis without worrying about inflation. Because in the time of crisis people will not spend, so when there is no demand, then there is no inflation. Even if in worst case demand increases also, then because of low interest rate industry will be in position take the money and cater the required the demand. So money should reach the people’s hands & pockets. So it’s all about boosting the sentiments of the people. Which creates rotation of money which leads to productivity & employment will be taken care of automatically. Like Keynes said give the money to people to dig the ditches and again to fill them. It’s the way of avoiding deflation & recession.

And coming to Foreign exchange policy, I think RBI is doing quite well. By holding partly convertible rupee around Rs. 50/$. Since I believe RBI don’t have any other options apart from selling Dollars through its reserve baskets as FIIs are demanding Dollars. In this crisis time at least it will help the exporters even though it is hurting imports.

In fiscal policy I can say that Mr. P.M. & F.M. foresaw the crisis and allotted quite as fiscal deficit in the budget & farm loan waiver is part of that. But now what can they do is reduce the taxes (I.T., Exercise duty & sales tax). So most of the people’s purchasing power will increase which again leads to demand and in turn production & employment. So they need monetary policy support here.

In addition to this government must continue with its infrastructure investments. I know it may not give immediate solution to present crisis condition but again it’s about people’s sentiments! In this we have 2 benefits; one is the kind of employment employed in this kind of big projects & second one is improve in infrastructure which will help all segments including farmers also so that they will be accessible proper markets and sell their agree products to a proper value. But how to implement this? Are our government offices so efficient & effective? I don’t think so! So one solution is PPP, Private Public Partnership. The best example was, when S.M. Krishna was C.M. of Karnataka he constituted the PPP by making Narayanmurthy(Mentor, Infosys) as a head of PPP. At that time only Bangalore & Karnataka improved a lot in terms of infrastructure, IT parks, land document distribution system(BHOOMI), midday meals in schools & etc. That different that after Krishna’s term Narayanmurthy didn’t get support from successive governments & instead people like our former PM Devegouda troubled him, so finally he resigned from that post.

So PPP is the best way to develop & implement the infrastructure.

Bottom line:

So everything is interlinked in terms of micro economy. Every other thing needs to support the other thing at least in the crisis hour.