New financial order needed to prevent
future crises
By Ashok Handoo, New Delhi

The Prime Minister, Dr. Manmohan Singh interacting the accompanying media on board flight to way back to Delhi, after attending the Summit on Financial Market and the World Economy, on November 15, 2008.

The adverse impact of global financial crisis on developed as well as emerging economies the world over notwithstanding, India is confident that it will not only be able to withstand the challenge but will also come out stronger.

The Prime Minister Dr. Manmohan Singh in his inaugural address at the Leadership Summit in New Delhi, said “we have the ability to sustain a growth rate of about 8 percent. And we will do so” The confidence that India had the “resources and the wisdom to grapple and deal” with the crisis, is no less reassuring. He emphasized that all instruments of public policy – monetary, fiscal, public investment and the exchange rate will be deployed to tackle the crisis. Noting that the global economy was in “deep crisis” and passing through “choppy waters” Dr. Singh said “we can and we will survive this.” The Prime Minister’s words are quite significant in a situation when the country needs to boost consumer confidence by increasing consumer spending and improving job securities. This needs a concerted effort both within the country and at the international level.

The Finance Minister too, has made it clear at the Economic Editors’ Conference that there is no fear of recession hitting the country, as the growth rate for the first quarter of the current fiscal is 7.9 percent. The second quarter, he said, undoubtedly will show a positive growth. He urged the Media not to use the word recession with regard to Indian Economy. Admitting that we are passing through a difficult situation Shri Chidambaram said both the Government and the RBI will keep on responding to the situation suitably, as it has been so far. The Government, he said, is contemplating to increase expenditure in the infrastructure and the flagship programmes as a countercyclical measure to global slow down. There was enough indication that if the inflation rate continues to decline, policy rates may also moderate. The general outlook, however, continues to be of “cautious optimism”

The Planning Commission is of the view that “India could get away lightly due to its limited exposure in the international market”. In its recent analysis on the impact of global financial crisis on India, it said the growth rate of Indian Economy in the current financial year will continue to be one of the highest in the world. To add to this optimism, the Chairman of the Securities and Exchange Board Shri C.B.Bhave said that the Indian stocks would be the first to bounce back in the global meltdown and that there was nothing to worry about. He pointed out that “we have not found anything in the market that would suggest something had seriously gone wrong with the market itself.”

One important reason for India’s optimism is that the country’s financial system is well regulated. Fortunately, the Global crisis is receiving a global response. Leaders at the G-20 summit, which comprises both the developed as well as the emerging economies, held in Washington agreed to face the challenge together. The summit was emphatic that the problem did not develop overnight and it will therefore not be solved overnight, but with continued cooperation and determination it will be solved. It was also pointed out that the crisis offered a wide open window of opportunity for financial reforms.

But questions are being asked whether the crisis signaled failure of globalization. Some economists are worried about the impact of the financial crisis on poverty reduction if it spurts protectionism, undermining free trade policies. The Leaders were of the view that the answer is to fix the problem and move forward with the free market principles.

President Bush was emphatic that the answer did not lie in reinventing the system. The Asia-Pacific Economic Cooperation (APEC) members who met at the Peruvian capital, Lima, warned that the crisis should not be treated with protectionism. It is being emphasized that the global crisis needs a global response through better cooperation among the nations of the world.

But some European countries like France and Germany are in favour of greater intervention. They want to change the rules of the game in the financial world and have been expressing surprise over warnings against too much regulation of financial markets. There is no denying the fact that the world economic situation is grim and that the impact of the current crisis will be most severe on the poorest of the countries and the poorest populations of other countries.

The crisis has spared no one. India is facing a growth slow-down from 9.3 percent last year, to around 8 percent this year. China, one of the largest economies of the world, may see a growth fall from well over 11 percent last year to 9 percent this year. Other countries are faced with a similar situation. What is now needed is all possible measures to boost consumer demand. And that is what India and other countries are doing. Central banks world wide are cutting key interest rates with some even bringing it close to zero rate.