‘We’ve spooked ourselves into thinking there is a slowdown’

Most of today’s problems in India have come as a result of sudden disappearance of liquidity; it is not that the demand has gone down.

For example, in the automobile sector, the main problem is non-availability of retail credit. Finance companies have virtually stopped auto and consumer loans. Even if the credit is available through some sources, it would come at a high cost. This has affected sales of auto manufacturers.

Normally, when a consumer sector like automobiles faces a slow down in offtake, it will also affect their input suppliers. Automobile manufacturers buy less steel and other raw materials. Demand for auto components will come down. This will have a cascading effect.

Today everyone talks about lack of liquidity; this in turn creates a lack of confidence. This lack of confidence has further aggravated the problem of liquidity.

Restore confidence


What has happened is that we have spooked ourselves into thinking that there is a slowdown. Look at any newspaper, any magazine or any TV channel; everyone is talking about the problem. Actually, we have no problem (as far as demand is concerned)…the problem is in other countries.

The problem here is lack of confidence. When everybody is talking about the problem, we tend to believe that there is a problem and act accordingly. According to me, this is a psychological thing. We have to first restore the confidence to stop this panic.

Demand depends on consumer aspirations. Latent demand has always been there in this country. The fundamentals of our economy are still in good shape. We have a very cost-competitive manufacturing system.

Yes, the level of consumer spending has come down. And this has affected demand.

To improve this, the cost of money should be brought down. Last four years, we had enjoyed unprecedented growth. One of the main contributing factors of this was the low cost of money. When the cost of money is lower, companies take up new projects. The very same projects would become unviable, when the cost of money goes up.

Improve liquidity levels


So what needs to be done is to make available enough liquidity at lower cost.

The RBI has done some very good thing. Last two-three week they have pumped in lot of money into the banking system. But, simultaneously an equal amount of money has gone out of the system. FIIs have taken out a large sum out of the country. Foreign exchange reserves have come down by more than $40 billion.

What the RBI has now done is to enable banks to have more elbow room. But the actual liquidity levels have not improved. And the cost of fund is still high.

Until a month ago, the RBI has been jacking up the rates to control inflation. The cost of money increased. And the inflation is still high. It is very important that the inflation should be brought down. Prices should not be allowed to go up, that will hurt the poor people.

Depreciating rupee


The monetary tool alone should not be used to tame inflation. Inflation should be controlled by increasing the supply of goods. Until a month ago, the RBI was trying to cut the money supply to control inflation.

Another major problem is the depreciating rupee. Our imports far exceed our exports. One may argue that a weaker rupee will help boost our exports. But our exports are a fraction of our imports. The deteriorating rupee, therefore, can create more internal problems than helping exports.

So steps need to be taken to improve liquidity, reduce cost of money, strengthen the rupee and restore confidence. Of these four factors, the most important is the last: restoring confidence. We are facing a serious crisis of confidence. We need to resolve this.

If steps are taken to address these issues, which are interrelated, the impact of the problem we are facing now, thanks to global factors, could be minimised.

Source: TheHinduBusinessLine