Mar 15, 2008

Have faith in India's real economy: P Chidambaram

Finance minister P Chidambaram on Tuesday suggested that investors, who have panicked following the turbulence in the financial markets, need to draw confidence from the strength of India's robust real economy.

And the government would, he told ET in an exclusive interview, take special fiscal measures to shore up any weak spots in that growth story. Specifically, fiscal measures would boost consumption in the economy, if the current slowdown in the production of consumer goods persists.

The index of industrial production showed a negative growth in the overall consumer goods production for two months this fiscal, September (a marginal -0.9%) and November (-2.6%).

Mr Chidambaram said, "We will wait to see if the negative growth in consumer goods production is just a blip. If the trend persists for a quarter, we will take fiscal measures to deal with it."

The finance minister's statement comes in the backdrop of a global stock markets meltdown, which caused a 13% fall in the Indian stock indices over the past two days. He said India need not be affected that much by the turmoil in the global markets as the "Indian economy was driven by its own robust investment and consumption. Ours is a long-term growth story based on real investments and consumption."

The finance minister also sought to separate the behaviour of the real economy from that of the financial economy. Asked how much of the current risks to India's economy comes from the weaknesses in the US markets, Mr Chidambaram said, "The risks emanating from the US have more to do with liquidity flows. These risks would apply perhaps to our exchange rate management or the management of capital inflows. These are external risks, which we will manage. The real economy in India is in good shape."

Asked whether increasingly heavy losses suffered by big US banks could lead to further withdrawal of funds from the stock market here, Mr Chidambaram said those banks did not have that kind of money invested in India. Their liquidity problem will be addressed mainly by their central banks.

The finance minister suggested India just needed to focus on its real economy. In this context, the negative growth in consumer durable production since April 2007 and the overall consumer goods production growth turning negative in November is evidently causing some worry.

If the negative growth in consumer goods persists through December and January, the finance minister is most likely to activate fiscal measures to boost consumption. Theoretically, this could take many forms. One could be to put more money in the hands of the people through adjusting existing income tax slabs.

The other measures could relate to excise reductions in consumer goods, as had been suggested by the Prime Minister's Economic Advisory Council chairman C Rangarajan.