Current Economic Crisis or Opportunity

I personally feel and strongly believe that today, India is in a unique position to change her economic status to be a global leader and lead the world finacial order. With due respect to all the top think tanks of the Indian economy, that includes, Dr. Manmohan Singh - PM, P. Chidambaram - FM, Dr. Montek Singh - DC.PL.Comn, Dr. C.Rangarajan - Fmr Chr PM's Eco Adv Council, Dr. Subarao - Gov RBI, and other esteemed and distingued contributors. But saying this, I feel that they are fire fighting, in the sense that they are waiting for a crisis to strike then fire fight, rather than to stay ahead of the curve and take some bold and concrete measures that will not only protect and insulate our economy from the current crisis, but will also stimulate growth. Unlike other Emerging Markets (EM), and BRIC countries.

The advantages that can be harnessed are,

* India's growth story in the last few years have been lead by her internal consumption rather than through exports. India's export's contribute only 20 - 25% of her GDP.
* A demographic profile which has the youngest population in the world.
* Falling commodity prices and falling crude prices.
* High rate of domestic savings and investments.
* Indian corporates are fully geared to meet the global challenges.
* Recognition by world powers about India's importance in the world scenario
* Huge forex reserves
* Low level of infrastructure (I have listed it as an advantage, because we can channel our investments and stimulate growth)
* Softening inflation
* Major portion of the banking industry is owned by the government.
* Higher levels of regulations
* Huge NRI population
* Global financial/banking meltdown
* Real estate and other asset classes crashing or correcting sharply

The challenges,

* Government of the day
* High exchange rate - USD
* Double digit inflation
* Liquidity crunch
* Global financial crisis
* Global recession scare
* Crisis of confidence
* High interest rates

Now the opportunity,

* With double digit inflation it does not make any sense to me to peg the exchange rate at 50/USD. With major portion of our import bill amounting to energy and crude oil, it makes more sense to use the fall on crude oil prices with lower exchange rates to make oil and energy more cheap and it has a direct impact on inflation. By bringing down the exchange rate, imported capital goods and other essential goods will also become cheaper. To my understanding the exchange rate can be pegged at around 35-37/USD. Critics may argue that this will kill our exports, with exports accounting for just 20% or little more of our GDP it makes sense. Also India Inc is used to lower exchange rates in the past and the net effect will be very positive.

* One of the major reasons for the Rupee to slide is the unprecedented pull of FII money out of the country. But we keep forgetting that, there is a huge NRI population with lots of liquidity sitting outside without knowing what to do with the cash. We can tap them, as they currently lack confidence in the global banks and other asset class, it would be prudent for our country to channel these funds into India as major portion of our banking system is sovereign backed and still our asset class has huge value left. This will ensure that the enormous pressure on the rupee will reduce and will bring down the exchange rate.

* To address the liquidity crisis the government along with the RBI can enact laws to use part of our vast forex reserves, which are predominantly invested in American securities and earn a paltry 3 to 4%!!! This reserve can be used to re-capitalise our Public sector banks and government can increase their share holding at today low levels and use this as an opportunity which any promoter will never miss. This ensure that the liquidity problem in the system gets addressed to some extent. After few years when the markets rebound, the government can disinvest part of this holding to book huge capital gains and channelise these profits into social infrastructure development and growth.

* As the inflation has started to soften, the government and RBI can plan for systematic rate cuts, and if the RBI also lowers the exchange rate, the inflation would soften further. By reducing the interest rates, this will create a unique opportunity to stimulate our economy once again to higher growth trajectories.

* Govt can start the investment cycle once again by promoting investments into infrastructure.

I am sure along with this, we can do many more things to convert the current crisis into an opportunity.