The present crisis over turned the basic idea of the capitalism that "the state should assume the role of facilitator rather than the role of regulator". It is quiet evident from the recent acts of the notable 'leaders of capitalism' as United Kingdom nationalized the private commercial and investment banks (pearls of capitalism), United States embarked on entering into the governing bodies of yesturdays corporate kingdoms. With the yesturday's statement, the Government of India took the anti-capitalist movement to the next levels. Given the status of the economic environment, i propose to critically evaluate the Govt of India's move in asking the industry to cut the prices of the goods produced by them.
During the last couple of months, the Govt of India infused Rs. 2,80,000 crore through a host of monetary measures and another Rs 1,00,000 crore through various fiscal measures. Thanks to the cordinated efforts by Ministry of Finance and RBI, the inter bank rates have (virtually) came down to the normal levels (though i suspect the normalcy in terms of transactions among the banks). Here, one should question the effectiveness of the measures so far taken by the MoF and RBI. These have been initiated at a time when the transactions among the banks were virtually non-existent, call money rates were at their hights of around 23% and most importantly the banks were no where near the position of either continuing or renewing the expired credit lines to the corporates. As noted by the pink papers, these measures are successful as they claimed to be drived down the inter bank rates. Here one should understand the real picture what made the inter bank rates to reach the normal levels?. It would have been appreciated if the RBI & MoF measures improves the confidence among the banking community over the solvency of their peer and if they transferred the newly infused liquidity to the real economy through continuing and extending the credit lines to the industry. Hardly there is no evidence on this front, there is no evidence of either new or renewed credit lines (without additional restrictions) to the industry; there is no evidence of healthy inter bank transactions. Hence, it is very clear that the RBI & MoF measures reduced the demand for call money (thereby interbank rates) by boosting the banks with the large chunk of easy money which has no signs of reaching the proposed ends (moreover it is reaching back to government coffers as banks are now heavily purchasing the government securites). Essentially, these measures so far taken have neither yielded fruits to the (real economy) industry nor to the banking sector as they failed to improve the confidence among the ultimate economic agents (consumers). Moreover, the steep fall in retail sales have jeoparadized the industry (which never had the chance of earning super normal profits given the fierce competition resulted from opening up of the economy) prospects by resulting in accumulated inventories, and increased credit bills. At this stage, the viability of the earnest Minster of Finance statement may be questioned? It makes me to suspect that the Govt of India is still in the dreams of "strong fundamentals" and not yet ready to accept its vulnerability to the crisis.
In this situation, the government should have the sole goal of 'improving the confidence' among the economic agents. It may be effectively achieved by relying heavily on fiscal policy measures. That is increasing the benefits to the unemployed (social security measures), infrastructure spending to boost the aggregate demand. The agrument against infrastructure spending in the prevailing situation is that they take too long to show the impact, but such an arument has no validity as the chances that this slump will be over anytime soon are virtually zero. Hence, it may be reasonable to get such projects get rolling and slowly injecting the confidence among the economic agents.!! (as i blogged for quite some time ago).
(Constructive comments and suggestions are encouraged!!)