India to respond swiftly and sharply to global recovery - RBI Governor

Some painful adjustment inevitable till the time global turnaround comes

India's economy would recover "swiftly and sharply" when the turnaround emerges in the global arena. However, till that time, "some painful adjustment is inevitable", says the Reserve Bank of India (RBI) governor D. Subbarao. In a meet organized by the Federation of Indian Chambers of Commerce and Industry (FICCI) in Mumbai, the governor expressed his views on impact of global financial crisis on India, collateral damage and responses.

Highlighting the factors that have put India on a high growth trajectory in the last few years, Mr Subbarao analysed the current economic impasse with a domestic perspective. Citing the IMF data, he stated that the world economy is set to contract by 0.50% to 0.1% in 2009. The impact of such a sharp global contraction on the emerging economies would also be very hard, as the decoupling hypothesis has gone for a toss.

There as been a reversal in the capital flow across the economic borders, sharp widening of spread between the government and corporate borrowing costs and abrupt currency depreciations.

Explaining how India has been hit by the crisis, Subbarao pointed that the contagion came from outside into India through:

- Financial channel
- Real channel
- Confidence channel

Dr. Subbarao also noted that unlike the advanced countries wherein the transmission mechanism was from the financial sector to the real sector, in case of India, the crisis has made its way into the financial channel via the real economy.

As a response to the global contagion that has entered the domestic economy, the central bank as well as the government has taken decisive measure. On the monetary front, the RBI has injected ample rupee and foreign exchange liquidity and also ensured smooth credit flow to productive sectors. Government's fiscal stimulus measures include additional capital spending, cuts in indirect taxes and support to ailing exports.

Giving an outlook for the country, the central bank governor said that the domestic economic activity is witnessing a slowdown with exports registering fifth consecutive decline. Service sector, which is the engine of the country's growth, is also decelerating. Investment demand as well as corporate margins has been dented. Overall, the growth moderation is steeper than earlier thought.

However, on the positive side, Mr. Subbarao said that local inflation has declined. He also assured that the domestic financial sector is functioning normally with a sound, healthy and well capitalized banking system. He also stated that wealth loss effect has been minimal in case of India and the domestic growth fundamentals like growing entrepreneurial spirit, rising productivity and increasing savings have been intact.