The first meeting between Prime Minister Manmohan Singh and US President-elect Barack Obama on 15 November in Washington, DC is likely to focus on economic issues. EU leaders, who met over the weekend in Brussels, have called for new global regulatory oversight over financial markets, an enhanced role for the International Monetary Fund (IMF), and, significantly, a larger role for India and China. These are opportunities for India to emerge stronger on the global stage.

The first step would be for us to admit, unequivocally, that we have an economic problem at hand. Analysts and the media have made it clear that it is not entirely due to the global crisis and that we have ourselves to blame as well. The slow, knee-jerk responses, the affirmation that all was well when the signs were to the contrary, have exacerbated the problem. It is important now to take stock and to find local, as well as global, solutions.

Indian stock markets’ decline has been triggered by news from across the world and accentuated by a small group of short-sellers who have relentlessly driven down prices of selected scrips and made a lot of money. Low asset values and continued redemption pressures are weighing down several mutual funds and the next few weeks will likely see some go under. The FMP schemes that were marketed aggressively in the past few months are turning out to be our own version of the subprime problem, for they are backed by assets whose values have declined considerably, and redemptions will be at distressed prices. Several non-banking finance companies (NBFCs) will find it tough to survive in the coming months. In 2009, there will be redemption pressures for foreign currency convertible bonds issued by companies: These are unlikely to be converted into equity as promised and will have to be redeemed—a burden of around $20 billion.

The real economy is seeing shorter work weeks and cuts in output. There are two reasons for this: In several states, the power supply situation is so critical that companies find it hard to sustain regular production; in other sectors, especially automobiles, slackening demand is adding to inventories. Expected poorer results for manufacturing in the coming quarter will feed back into the financial markets to accentuate the problem.

Finally, the services sector is also feeling the heat. Though IT is putting up a brave face, there is a slowdown in tourism and hospitality, and also in airlines and travel. Overall, the optimistic growth outlook of at least 7% for the current year and 5% for the next seems misplaced.

The first problem is financial. Monetary policy interventions are in the right direction: It would help if they appear well thought out and reasoned, rather than panic reactions. Once the mutual funds and NBFCs start getting affected, there will be serious disaffection among people, and it is important to prevent this. It may not be appropriate to sit back and argue that this kind of individual risk is not under the purview of any regulator, Sebi or RBI. Perhaps this is the time to consider a bailout or guarantee of the kind used elsewhere to ensure that citizens who have invested in these instruments are protected. Perhaps it may be necessary to access global funds, including from IMF for this. At the same time, it is time to put in place a world class regulatory architecture to preempt such problems.

Second, to get industry going, monetary measures alone will not suffice. Demand has to be generated through government spending—for instance, demand for buses by augmentation of bus routes and replacement of buses, payment in kind (textiles) under the National Rural Employment Guarantee Scheme and the leveraging of municipal finances to take up urban renewal projects to increase demand for steel, cement, bitumen and road building equipment. This can be done without adding to the fiscal deficit, through reallocation: It is only necessary to look at state and national budgets carefully to reorient priorities. Again, an omnibus line of credit from international institutions such as the World Bank could be considered.

Finally, the states cannot be mute spectators, as if citizens are no longer their people for these problems. There has been no effort to involve state governments in seeking solutions, which is somewhat surprising. Regulatory oversight over consumer prices, and hence over food price inflation, is clearly a state responsibility, and we actually saw tomato prices dropping in Delhi after an agitation.

The economy has several inherent strengths that could help it decouple from the rest of the world and grow. The large agricultural sector, strong internal consumption demand and our saving habits will bring the economy back on the growth path. In the interregnum, it is important to ensure that policy interventions are well thought out and implemented well.

S. Narayan is a former finance secretary and economic adviser to the prime minister. Your comments are welcome at