How to better the current economic situation in India

>> Sunday, March 22, 2009

Economic Times in an article today reported that the based on the lower the expected Inflation numbers (0.44% ) the Reserve Bank of India must further cut its Repo, Reverse Repo and may be CRR rates to provide necessary stimulus to the economy. We all remember that RBI already has cut its rates to record minimum, the latest cut being announced on March 4th, which led to repo rate being brought down from 5.5 to 5%, and the reverse-repo down to 3.5% from 4%.

What do the rate cuts serve to achieve? - Encourage banks to ease consumer and business borrowing by offering lower lending rates.

Well this makes sense in theroy, but is the consumer ready to borrow? Is he or she ready to invest in a car or home or decide to increase their discretionary spending? I do not think so.

The consumer has retreated in to a shell, from where it is difficult to spend money. But why are they consumers so wary of spending? The underlying problem is the fear of uncertainty about tomorrow. If we take a back in to the past 6-8 months, the words slowdown and/or recession were being mocked at in India. The so-called pundits helped build a wall around peoples minds telling them that India will remain more or less unaffected by the ills of the credit crisis plaguing US and much of the major economies. This mis-information shrouded us for taking precaution and preparing ourselves for the upcoming misery. And when the truth dawned up on it was too late to take any evasive action and because it was so sudden the impact has been far more worse.

But who is to blame for all of this. The pundits, the media, the newspapers, TV programs? The onus lies on each and every one of us. If it is our hard earned money we are investing in the market, then we cannot blame someone else for our losses. We had to stay more informed and follow information without verifying and applying logic to it. In one way we cannot even trust the government. If you remember the speech in Feb-08 from P Chidambaram he was very confident of India continuing on the pace of 8-9% fiscal growth. Even 6 months in to 08 the finance ministry did not forewarn or raise flags of possible reactions to the credit crisis of US and Europe.

Today the condition is so bad that business big or small, individuals rich or poor, in one way or other are feeling the pinch. The Elections provide another reason for the consumer to push oneself further deep in the shell. The announcement of the Third Front, Mayawati being projected as the prime ministerial candidate, Congress and BJP not being strong enough to win a majority leads to many investors to believe that the economic stimulus, change in fiscal policy needed to fight the downturn may not be able to come till July-August time frame.

So should the RBI cut rates again? Will this have a big impact on the current state of the economy? Will bank easing borrowing rates encourage people to buy new homes or new cars?

It is the weekend, definitely something for all us to think about !

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