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
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