The Hindu : Karnataka / Bangalore News : ‘India facing slowdown of growth, not recession’

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Friday, Dec 12, 2008
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‘India facing slowdown of growth, not recession’

Nagesh Prabhu

Bank’s unwillingness to lend has contributed to the economic slowdown, says Suresh D. Tendulkar

‘The financial institutions in the country are in good shape’
‘Stock market is not everything in the economy’

Suresh D.Tendulkar

Bangalore: Suresh D. Tendulkar, Chairman of the Prime Minister’s Economic Advisory Council, says that financial institutions in the country are in good shape. However, there is unwillingness on the part of the banks to lend which has contributed to the economic slowdown.

Here are excerpts of the interview:

Q. There is a lot of talk of economic meltdown at the global level and its impact on India. Can you explain the steps taken by the Centre to address this?

A: The meltdown is a financial one and it has an impact on the financial institutions in the advanced industrial countries. This, in turn, has an impact on the real economy and leading to recession. As far as India is concerned, it will essentially influence through the balance of payments, that is demand for our exports and capital inflows. These are two channels it will be affected. As far as our banks are concerned, their exposure to this kind of toxic instruments has been negligible. They are adequately capitalised, they are at an advantage because they are owned by the Government. So, consequently, the financial institutions in the country are in good shape. Now, there is an irrational unwillingness on the part of the banks to lend, which is what is contributing to the slowdown of the economy. That the financial collateral would have affected the economy was clear and the July forecast of the PM Economic Advisory Council had indicated that there will be slow down in the growth rate from 9.3 per cent to 7.7 per cent of the GDP. We are now taking another look because what seemed to be happening there is irrational crisis in this country for which there is no apparent justification. Yes, export related industries are affected and capital is flowing out is essentially expected. But there seems to be irrational crisis of confidence among the banking institutions to lend and there is not justification for it per se. Firstly, the Government is trying to workout the sectoral packages for the affected industries, particularly exports related. Secondly, it is also making efforts to attract inflows by relaxing restrictions on the external commercial borrowings by basically trying to induce NRI deposits.

Can we call the slowdown in the growth rate as the economic recession?

In the Indian case it is absolutely wrong to call it recession. Recession by definition is absolute reduction in real GDP which is taking place in the U.S. and some of the European countries. In India, it is slowdown in the growth and not recession. So, it is wrong to call it recession.

How do you correlate the economic slowdown and inflation?

You see, the rate of inflation has been coming down since mid-September. It is already in single digit. Currently, inflation is not a major problem because with good harvest the international commodity prices have been falling. Both these factors are going to relax the supply bottlenecks which has led to inflation. So consequently, the inflation would be a much lesser of a problem now. The rate of inflation has come down.

What are measures the Government has taken to arrest the slide in the stock market?

The stock markets are internationally integrated. So they cannot escape. It is happening abroad.

The crisis of confidence there is deep. All the bailout packages which have been worked out in Europe and the U.S. do not seem to be working and they are sympathetic movements in the Indian stock market. But stock market is not everything in the economy.

The service sector is booming for the past decade or so. Now given the recession in the advanced world, how do you asses the impact on the Indian service sector in terms job cuts and salary reduction?

In the last one year, one was hearing of scarcity of technical manpower. Indian salaries were rising as compared to other countries. So, the companies which are likely to be affected are those which are servicing the financial institutions in the advanced countries which have been facing slowdown. But you must keep in mind those institutions trying to come up.

They have to cut down prices and cost and that would increase the demand for outsourcing. But I do expect fair amount of reshuffling across the sectors of the technological manpower. I don’t see unemployment among the technically trained people. They might be unemployed for a while.

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