part 3: what could India/world do to avoid a deep recession?

• Continuing on the above theme,The article by Shri N K Singh referred to earlier makes a interesting suggestion of increasing pace of lagging public investment programme .So after all there is some merit in the inefficiency of public investment programme- govt could improve efficiency of public investment programme and hence check recession without increasing fiscal imbalance. Such budgeted but unutilized resources could be significant
• With several economies gearing up for a rate cut, what could bolster these measures is a limited time “sovereign” guarantee that Central Banks/Govt could provide to banks lending to companies that meet certain financial criteria. This will considerably take out fear prevailing in the lending community and add more power to interest rate cuts etc. Govt in effect could be working like a part time insurance company and even make a neat profit by sharing part of interest income in return for taking over part of lending risk.
  
• To lend stability to stock markets, governments could encourage hybrid of closed and open ended mutual funds by requiring higher dividend share to those opting for closed ended mutual funds in effect taxing open ended MF investors to compensate holders of closed ended MFs who would be imparting more stability to markets in case of crash and cutting down on panic selling.
  
• Bailout by US has serious dissenters particularly those who have to pay for fault for errors of others. Is it not possible to devise penal taxes that bailout beneficiaries will be required to pay once they regain financial health that will somewhat imperfectly compensate those taking over bailout burden?
  

What did and world should do to avoid deep recession?

An article by Shri N K Singh in ToI explores today ( oct 27) explores other options to deal with current economic crises.

One wonders why Govts must wait for economic data to take action. Simple theory and availability of good performing macro econometeric models would confirm the direction of indian economy under "no action or limited action' scenario" and hence need for pro active action

fiscal imbalance is a real concern but it is not going to get any better with economy on a slower growth path. It makes good sense to follow counter cyclical budgetary policy that one often reads about and this situation is ideal for practicing that.

Has RBI erred in not cutting rates? Many think so and delaying such a decision may worsen matters.

It is not clear if some kind of market stabilisation fund as suggested in article above would have desired effect. FIIs may be selling due to presure back home and trying to stabilize the market may not be of much help . Market has tanked so much that significant wealth effect must have kicked in and a further fall of 1000-2000 points would not make much difference to market sentiments or wealth effect. Stabilizing markets could mean just that- buoyancy and wealth effect could take a long time to return. However market experts should to table to discuss further measures to strenghten markets such that indian and foreign pension funds which are long term investors have a greater stake in Indian markets rather some high flying hedge funds out to make quick money.

It is time to revisit incentive structures in financial instutions that may contribute to asset bubbles. After all there must be micro economic measures that could help to turn the money tap off when asset prices begin to become "uncomfortable"( please wait for a incentive game structure problem that if successfully constructed might be put up on this blog).

As stated in an article on this blog about the beginning of this year (click here: subprime crises and dollar deluge) that surplus dollar available with countries like China and India ( may i add - possibly petro countries ) could be incentivized to buy in to beaten down real estate prices in US. That would require more knowledge of US economy and its regulatory measures. Restoring confidence in US economy and its financial system is something that is both urgent and for the greater good of all.

First thoughts: what India/world should do to avoid deep recession?

 

What should India and world do to save a deep recession?

 

I believe what is worse aspect of the current crises is loss of confidence, fear and insecurity especially among the finance community. This will inhibit lending for even safe projects for quite some time. Thus a otherwise mild recession may take deeper roots. Increasing liquidity though important will not be enough.

 

Solution is Keynesian  with government to be main driver not as provider of liquidity to boost demand but other way round. In India with huge funds being pulled out, perhaps GoI should not shy from running a even more balanced budget to boost demand ( without it drop in collections from a  downwardly spirlaling economy may anyway cause budgetary imbalance).

 

With sharp drop in commodity prices and negative sentiments this may be a good time to give and bargain  long term contracts for range of investment projects especially in rural areas( this will additionally boost agricultural productivity). Govt can thus not only lower cost of investment projects but also boost demand and increase liquidity in economy ( give easy start up installments to companies). Inflation fear would probably be misplaced in the current scenario of drying out liquidity.

 

What applies to India is likely to be true for many economies especially USA. Bottomline. Time to be more  Keynesian running an even more unbalanced budget rather than simply try to put more money in economy