Revival of the Economy

The present crisis for the first time in the modern history has created a deeper impact across the world and reduced the demand for goods and services and consumption was down. The free flow of money has come to a stand still and there is a loss of trust and confidence in business dealings .

India did not escape this impact but unlike in other countries, the impact was not very severe but still many industries witnessed a sharp fall in demand. The large domestic market supported by stimulus measures initiated by government and RBI helped to face the downturn.

Around the world, banks and companies have used this as an opportunity to restructure their businesses and become more competitive so that they can capitalize on the opportunities when the revival takes place.

In the present scenario, the governments are playing a major role in sustaining the Economic growth momentum. The stimulus packages implemented by governments across the world has helped to increase the economic growth in all parts of the world. In India, the measures adopted by the government has gone a big way in achieving an healthy Economic growth in 2008 – 2009. The crisis has not yet come to an end and there are predictions ranging from bottom is yet to be seen to green shoots have started appearing.

To prevent worsening of the situation and to stimulate the growth, the governments have to play a major role for at least another two / three years so that the world can come back to its old momentum. From Indian perspective, the following measures would help to revive the economy faster.

1. The Indian Government should continue to provide the stimulus measures for at least one more year . Now that the statistics is being collected on the sectors which are most affected, unemployment, etc. Stimulus measures should be developed targeted at sectors where the impact is very high in terms of loss of business, forex earning, jobs and high erosion in margins .
2. The government spending should be kept at high levels and as Planned , the scope of NREGS should be widened to cover more beneficiaries. A scheme like NREGS should be introduced targeted at urban poor. This will help to retain the purchasing power among in both urban and rural areas.
3. The sixth pay commission has increased the purchasing power of employees at the Centre as well as states. To increase the demand for consumption goods , the banks should formulate lending schemes targeted at Government employees for the purchase of consumer goods. The stimulus required in housing has already happened and nationalized banks are offering loans at very attractive rates. This should be continued for one more year.
4. The growth of Infrastructure and housing development creates demand for many industries. Hence there should be an increased focus on the higher growth of these sectors in the Economy. Government should continue the initiatives taken so far in these sectors and identify further scope for increasing the allocation.
5. Since the government expenditure is very high on account of stimulus measures, it is going to put an additional pressure on government finances and the budget deficit is likely to go up. This will result in higher borrowing by government which will result in higher interest rates in the Economy. But there is a need to keep the interest rates at low and competitive levels so that the borrowers financial strength is not affected. To reduce the risk of increasing interest rates, the government has to resort to non conventional sources financing the Union budget and additional resources could be generated by improving the efficiency of PSUs, capitalizing the land bank available with the government and PSUs, higher dividend from PSU’s and from government institutions like RBI and LIC.
6. Monetary policy. Monetary policy should be growth oriented . The interest rates in the Economy should be kept at a low level and the inflation should be targeted. The policy should be able to moderate the inflationary expectations and help to achieve a lower level of inflation. Despite inflation is very low at the WPI level due to the basket of goods in the index does not take care of the present reality, for decision making, the CPI should be looked at.
7. Bank Credit. There was a decline over the previous year, since companies have reduced their debt levels as a result of financial restructuring. There should be an healthy growth of credit . The banks have to identify the sectors which are still growing and generating employment and start offering credit to these sectors. They can identify the firms which have become more competitive and provide the required financing for growth.
8. The government has to closely monitor the prices of essential commodities, which form the main items of consumption among the poor and bring in control in pricing of essential commodities in the economy.
9. The global trade had witnessed a decline and part of the export demand vanished. Hence going forward there has to be an increased focus on creating and meeting the domestic demand. There are many sectors like IT, Apparels, Gems and Jewellery which were focused on exports can partly offset the loss of demand on account of recession through increasing their presence in India.
10. The present crisis has forced many companies to restructure their operations. But still many more companies are yet to achieve the optimum efficiency level in operations. If companies have already become lean in their operations and generating cash , then they should identify action plans for sustaining this momentum and explore further scope for improving the competitiveness. Others who have embarked on this exercise, should identify and adopt the best practices in the industry.
11. Capital markets. In India, sentiments have turned positive after the election results were announced and this has resulted in positive developments in the stock markets. After a big interval, companies have started raising funds through IPOs, ECBs, QIPs. FIIs have started investing again. These sentiments have to be sustained through confidence building measures and the government has to play a major role in bringing back the confidence levels.
12. FDI. Looking at the potential for growth, companies from around the world across sectors had shown interest in fresh investments, additional investments in India. Liberalisation of FDI has taken place in many sectors. The liberalization should continue and the government should liberalise few more sectors which are growing fast which would help to attract the foreign capital.