Finance Minister P Chidambaram speaking on the effect of the current global crisis on India said that there have been recessions in the past but added that the current recession threatens to last longer and deeper than before. He said that India does not have a problem but is bearing the brunt of the spillover of this global recession.
Chidambaram said that 60-65% of India’s workforce depends on agriculture and he expects a bumper crop this year and feels it will continue to grow at a robust space.
Chidambaram is confident that India will see a good growth rate at the end of this year and said that his lowest estimate of GDP is 7%.
“In the last sixty days both the government and the Reserve Bank of India (RBI) have moved swiftly to take steps that will ensure adequate liquidity is provided to industry. “ However, Chidambaram said that providing liquidity is not the panacea for the current crisis. “Providing liquidity is only the first step, the second is ensuring appropriate price and the third step is ensuring that at that price credit is actually delivered to industry.”
Here is a verbatim transcript of P Chidambaram’s speech on CNBC-TV18. Also watch the accompanying video.
Tthe world economy has changed more rapidly in the last sixty days than it has over a long time. But this is not the first time in which industrialized countries are going into a recession. There have been recessions in the past in Japan, in Europe and in the United States (US).
This recession of course threatens to be a longer and deeper recession affecting more industrialized countries. We in India are experiencing the spillover effects of what is happening in the advanced countries.
We are not the cause of the problem but we are being invited to be part of the solution to the problem.
The crisis will end some day. We must take note of the structure of economy and the manner in which most Indians live and work.
Sectoral outlook:
About 60-65% of India’s population and workforce depend on agriculture and agriculture continues to grow at a robust pace. The rabi crop is the main agricultural crop in India. In terms of sown area of wheat; we have already sown 2.69 million hectares as against last year’s 2.19 million hectares on the corresponding date. Maize stands at 2,32,000 hectares as against 1,77,000 hectare last year, jowar at 4.19 million hectare as against 3.59 million hectares last year, pulses at 6.6 million hectares as against 5.5 million hectares last year, oilseeds at 6.05 million hectares as against 4.34 million hectares last year.
The total sown area has increased very significantly this year. The monsoon had been good, farmers are busy with their work, they do not look at the Sensex or the Nifty everyday and we will have a substantial bumper crop.
The services sector in India is driven by million of small and medium enterprises. They are facing some liquidity problems but we are determined to ensure that they have provided adequate liquidity so that they can carry on their work and their business until we tide over these crises.
The section that is affected is the industrial sector; especially large manufacturing industry and the financial sector.
Newspapers are full of the problems faced by the financial sector and industry because it is people from these sectors who are readers of the newspapers and who advertise in the newspapers.
The media naturally focuses on the industry and the financial sector. These sectors indeed face problems.
We are extremely vigilant; we have been proactive. Infact, in the last sixty days both the government and the Reserve Bank of India (RBI) have moved swiftly to take steps that will ensure adequate liquidity is provided to industry.
But as I have said previously, liquidity alone is not enough. Providing liquidity is only the first step, the second is ensuring appropriate price and the third step is ensuring that at that price credit is actually delivered to industry.
I think these are not insuperable problems, these are not insurmountable problems. While the world output will decline and to that extent affect our exports, affect some capital inflows, affect external credits, we must be able to quickly substitute or compensate for that by stimulating domestic demand and providing liquidity in the domestic market.
The CMIE (Centre for Monitoring Indian Economy) captures data on investments. They say that inflation, rising cost of capital and fears of a global economic slowdown have not reduced the enthusiasm among Indian corporates to set up fresh capacities or expand the existing ones.
This is well captured in the data collected by CMIE.
We captured 557 new projects in the September 2008 quarter adding Rs 5,22,812 crore. This is the third largest quarterly investment captured in India’s history. While, 557 new projects have been captured in the quarter ending September 2008; 48 projects have been completed in this quarter and CMIE also notes that 45 projects have been shelved.
On GDP:
So I think what we need now is to deal with each problem as it arises. Anticipate the problem, deal with it by using sound economic principles and a certain amount of courage and confidence. While there is a slowdown, what does a slowdown in India mean? The lowest estimate of any think-tank in India is 7% growth. Why is 7% growth a matter for wearing sackcloth and ashes? The world output will go by about 2% that is still three times the world’s growth.
There will be a slowdown but the steps that we have taken and that we will take can to a large extent compensate for the factors that are causing the slowdown and I am confident that we will end this year with a very satisfactory growth rate.
I cannot put a number on the final growth rate. IMF’s (International Monetary Fund) estimate made last week places at 7.8% many analysts have said between 7% and 7.5%. The RBI has said 7.5% to 8%. If anyone can tell me that the worst is over for the world then I can confidently predict what the growth rate will be. But let us assume that for another month or two there will be further bad news; even then we will grow at a satisfactory growth rate. Next year we will bounce back to a much better growth rate.
What is required now is confidence, courage and taking the steps that are necessary to compensate for the ill effects of a world slowdown.
On Indian exports:
It is likely that our exports will dip and we may not reach the USD 200 billion but that was what I said last year as well but eventually we reached the target last year. We will be close to the target this year but we can compensate for that by stimulating domestic consumption.
On capital flows: We have already witnesses some outflows as a result of Foreign Institutional Investors (FIIs) facing redemption pressures back home. But we are compensating for that. The World Bank has promised to substantially increase developmental assistance to India. We are looking to multilateral regional banks for more funds to flow into India and we have relaxed the conditions under which the Indian industry can raise capital aboard both debt and equity. A number of companies have in the last 10 days raised ECB abroad at very attractive rates. So we can compensate for that by allowing our companies to raise capital abroad.
On depreciating rupee: The rupee has depreciated because the dollar has shown an extraordinarily strong performance and so it’s ironical that money is flowing back to the country where the crisis originated but that is the complaint I have heard from every Finance Minister in the world. There is pressure on the rupee. But once the flows reverse as we believe it will, FCNR rates (Foreign Currency Non-Resident (Bank) {FCNR(B)} account have been revised, ECBs have been liberalized. Once the flows begin to come into India, it is quite possible that the rupee will climb up.
At the moment there is a huge demand for dollar coming mainly from oil companies and others who have to meet some payment obligations. It is quite possible that in about a month or two the direction of flows can reverse. FDI’s are still quite strong and the rupee will settle at an appropriate level.
Sensex and Nifty:
I think what is important is not to be focused on the Sensex or the Nifty everyday. If you look at that you suddenly feel you have become poorer, you have not become poorer or richer. This is simply an index which points to the estimate of investors of the potential of that company or that sector in the future. That one number should not determine all our actions. It should not determine what we have for breakfast and it should not determine whether we go to the gym or not or it should not determine whether we will take a walk in the park.
That is a number but there are many other numbers which I think will make for the totality of India’s economy. Agriculture is robust and we will ensure the services sector dominated largely by SME’s is provided with adequate liquidity so that they can carry on with their business. We will take steps to stimulate the domestic economy to compensate for the downsides caused by a downturn in the world economy.
At the end of the year, you will find that India has returned a very satisfactory decent growth rate given the world conditions and next year I am confident we will bounce back
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