BUSINESS

Economic crisis? India's tide has turned

By T N Ninan
October 04, 2008 13:56 IST

When the really bad news dominates the headlines, as the western financial crisis has done these past many weeks,  the good news tends not to get noticed.

We forget that, three months ago, the over-riding economic problem in India was inflation. So the good news is that the tide has turned.

Not just because the weekly wholesale price index now reflects 11.99 per cent inflation (down only modestly from a peak of over 13 per cent), but because global prices are falling.

Oil has been dipping steadily for weeks, and is now in the mid-90s when it comes to dollars per barrel.

Almost all other commodities too have been slipping -- whether metals like steel and aluminium, or agri-commodities like rubber and palm oil.

The prominent exception is gold, but that comes in a separate category.

To the extent that domestic inflation in 2008 has been driven primarily by imported inflation, this means that  the government spokesmen who have been forecasting a drop in the inflation rate by the end of the year are probably right.

And when one looks at the domestic supply scene, the fact that the 2008 monsoon has been a good one augurs well for inflation control in the coming months.

To be sure, one man's inflation is the next man's income, so there will be producers who will look askance at this new trend.

Steel companies, for instance, will have to prepare for a new revenue scenario. But in terms of the overall impact on the economy, this is good news that will now stay with us for some months.

The second bit of good news is how well the economy has held up in the wake of the storms that have been blowing around us.

Whether it is the export numbers for August (up 27 per cent), or industrial growth in July (up 7.1 per cent), or even advance collection of corporate taxes (up a handsome 34.5 per cent till September), the signs point to an economy that has surprising momentum.

To be sure, the stock market has taken a beating and has dropped lower than its index level two years ago; but it was only to be expected that the price bubbles in stocks and real estate would be pricked.

Meanwhile, the fact that the rupee has dipped quite sharply against the dollar  (by 15 per cent in the last 12 months) means that all those who worried about what an expensive rupee would do to exports can now quit worrying --exporters have a new price incentive, since the currency movement has helped them.

The third bit of good news is that the system has plenty of defences available, should the financial crisis hit India's shores.

The Reserve Bank has far more dollar reserves than the total foreign portfolio holdings in the Indian stock market as well as short-term overseas debt combined, so no one need fear a currency crisis.

There could be a domestic liquidity problem if foreign institutional investors flee en masse and want to take out dollars in exchange for rupees, but the market stabilisation bonds that the RBI had issued can be bought back in order to pump rupees into the system.

In addition, the fact that India's banks are so well-capitalised, in comparison with both American and European banks, imparts its own stability to the system.

For many commentators (yours truly among them!) who had predicted dire times for the economy because of the multiple problems coming together, all this has come as a pleasant surprise.

What one can hope as the second quarter corporate results start trickling in, is that the system continues to surprise us on the upside.

T N Ninan
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