FinancialCrisis Opportunity to act and improve

Present Financial Crisis An Opportunity to Act and improve



The economy shows signs of slowing down, but certainly does not call for panic reactions. Compared to the 1991 crisis, the present situation does not look bleak or does not seem to be any cause for concern. Fundamentals continue to remain strong as Inflation, Fiscal Deficit, GDP growth, Current Account Deficit, Balance of Payments position, Forex Reserves in particular , soundness of the Financial and the Banking system etc when compared to the 1991 situation show an impressive position, although there are aberrations which are caused only because of the linkages with the global economy. No doubt there are some problems in the form of ripple effects emanating from the aggressiveness of the US Financial system to which financial markets of both developed and developing economies are linked expecting better performance and growth. The US system was taken as a benchmark and blindly all followed it without bothering to understand, identify, measure and manage the risks involved while having business deals. No institution assessed its own share of risks while originating, transferring and distributing of risks under the guise of derivatives. Fortunately our economy and financial system came unscathed although severity of adverse impact on others is felt and confidence is bit shaken. Except for the liquidity crunch and perhaps anticipation of reduced dependence on our economy by the world market because of their deep involvement in the present crisis, there does not seem to be any concern for the economy to press the panic button and go in for any knee-jerk reactions.

Monetary measures in the form of reduction in CRR by 3.5%, reduction of Repo rate by 2.5%, SLR reduction by 1% and other measures to provide assistance to Mutual Funds and NBFCS have already been introduced to support credit growth, maintain economic growth taking advantage of the softening trend observed in the rate of inflation, reduction in international oil prices. These measures can yield results only if they are equally supported by some fiscal measures. These can be in the form of;

1 Encouraging infrastructural development to give a boost to employment, all round demand for all sorts of products including capital goods and services.

The expenditure no doubt will increase the fiscal deficit, but in the long run the direct and indirect benefits that will accrue to the exchequer can easily wipe out the deficit. Alternatively Govt can have a separate account styled “Special Expenditure to Develop Infrastructure” not accounting for the purpose of arriving Deficit Finance. Funds can be mobilized for this from the market through floating of long term bonds to attract funds which can include even black money from both domestic and international markets. Special incentives in the form of tax concessions and other reliefs can be considered to attract funds. This can be a one time measure justifying the extra ordinary circumstances in which the economy is presently placed.

2 Offering tax concessions/exemptions to attract funds towards capital formation particularly under Primary market.

3 Introducing expenditure tax or disincentive tax for those indulging in extravaganza beyond certain cut-off limits.

4 Introducing a special levy on purchases of two or more houses, cars, frequent trips abroad, land and real estate deals like shares and debentures, etc.

5 Offering Government guarantee for a small fee in a very selective manner to enable well performing Mutual Funds , private sector banks, NBFCs, Large public sector undertakings to raise funds from abroad.

6 Plugging all possible loopholes in evading taxes. For this, the easiest solution would be insistence on cheque payment for all transactions above Rs 15,000. Cheques should invariably carry the PAN No.

The present crisis should be taken as a god given opportunity and there is nothing wrong fishing in troubled waters as the measures would certainly benefit the economy for a long time to come as the saying goes ends justify the means.





Dr.T.V.G.Krishnan