On Monday, after the Indian stock market plunged in early trading, the Indian government sent out its big names to assuage investor fears about the ability of the economy to weather the global storm. They all spoke in one voice. Each statement drove home two basic points: India will not be untouched if conditions deteriorate but the underlying economy is resilient. So the statements were both realistic and reassuring.
Finance minister Pranab Mukherjee said that while global uncertainty has increased and there could be some impact on India, the growth story is intact and fundamentally strong. He added that India is “in a better position than many other nations to manage the challenge”.
The Reserve Bank of India said in a statement on its website: “India is not insulated from such developments. It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8%, suggesting high resilience emerging from domestic factors. While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact”. The central bank also reassured that it would act if needed to provide liquidity in the domestic financial markets.
Chief economic advisor Kaushik Basu said the recent market reaction to global turbulence was a panic reaction. He added: “Should the need arise, the government and the central bank are in a position to step in. But barring the immediate reaction to what is happening now, the India story remains robust.”
Planning Commission deputy chairman Montek Singh Ahluwalia was also sent out to calm nerves. His main pitch was that the Indian economy continues to be driven predominantly by internal factors though he was careful to add that there would be some impact if there were a bout of global financial instability. “We have to watch the situation,” he told reporters.
The swift reaction from the government to calm nerves is welcome. But this strategy will deliver decreasing marginal returns if the global environment continues to deteriorate and hurt the Indian markets in the coming weeks. A Plan B to build confidence will also be needed. This is why the current buzz about the announcement of some significant economics reforms soon is important.