The government has done its bit to try and prevent the current downturn from

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becoming avoidably longer and deeper. Three measures, namely, fuel price reduction, further loosening of the monetary policy stance and the $6 billion fiscal stimulus package, were announced over the weekend. The timing clearly was determined by the electoral cycle, as these measures could not perhaps be announced with the electoral code of conduct in place.

If true, this raises an important issue. Some policy responses may be urgently needed to address future national emergencies even during the ‘election period’. Therefore, the Election Commission should consider some flexibility in the code of conduct to prevent serious harm happening from not being able to take the necessary action because of the code of conduct. One condition could be that all major parties agree on the necessity of such measures and inform the Election Commission.

The market response to the government package has been mixed. The widely shared perception is that the package was big and bold enough to provide the needed thrust to domestic demand or help raise investment intentions. More measures might surely follow but it would have been better if the Centre had been bolder and demonstrated strongest possible commitment to sustaining growth.

More importantly, these announcements have to be supplemented urgently with action on the ground that will ensure efficient and effective utilisation of these additional public resources. These actions could include, as also stated by the deputy chairman of the Planning Commission, efforts to absorb the additional Rs 3 lakh crore that have been pumped into system through the supplementary budget, which was passed in November; pushing ahead with the highway and power projects and infusing more life into the urban mission and the Bharat Nirman Yojana. This requires focused efforts that can be achieved if there is realisation that this is crisis time. Our system unfortunately does not respond in a ‘business as usual’ scenario.

It is fallacious to argue that just because the global economy is in a downturn, our exports must necessarily decline and we should attempt to depend entirely on domestic demand for stimulating growth and ‘decouple’ the Indian economy from global markets. This is almost akin to arguing that we should now be raising import tariffs to prevent cheap imports from benefiting our consumers and giving the domestic producers a run for their money. This should be resisted.

With net exports contributing a negative (-) 6 per cent to Indian GDP growth between 2003-2008 and with Indian exports still at less than 1.5 per cent of the total world exports, export pessimism is totally uncalled for. Instead, this is the opportunity to take the axe to complicated procedures that still impair our export effort and make the numerous export promotion councils earn their keep. A poor, labour-abundant economy must necessarily depend on exporting its skills, either embodied in manufactured goods or as services or labour movement across borders. India cannot hope to be entirely different.

But the more important issue at this stage is for the private and public corporate sector to rise to the challenge and play its due role in fighting the downturn. This has so far not been forthcoming in any noticeable manner. The auto and cement companies have been quick to pass on the 4 per cent cenvat reduction, but this has so far not been emulated by other industries. Domestic firms have had a terrific profitability run for the last seven-eight years. They can certainly afford a slight decline in their margins to try and boost demand. Therefore, the private sector should not only immediately pass on the cenvat reduction to the consumer but also reduce prices further and match the cenvat reduction by an equal amount of price reduction over and above that. This is their national duty at this time. More importantly, such a price reduction also makes strong commercial sense. Better to reduce margins now and maintain healthy ‘top lines’ than having to cut down production and lay off workers and still be unable to save the bottom lines from declining. It is time to shift to total revenue maximising model instead of maximising profits.

Similarly, commercial banks, with average return to equity at more than 14 per cent in 2006-07 can contemplate lowering interests more than the anemic 1 per cent that some have announced. Average cost of deposit in India is stated to be about 6 per cent and the prime lending rate now is above 13 per cent. While there are many constraints and mandated lending requirement for commercial banks, the spread does remain relatively high. This is best reflected in the net income differential, which is at about 3 per cent for the Indian banking sector. This is substantially higher than for banks in developed economies, where it is typically below 1 per cent and also higher than Chinese banks, where this is about 2.5 per cent.

This spread must be brought down, thereby lowering the cost of capital for investors. Credit-to-GDP ratio remains woefully low in our country and the exclusion ratio, which reflects the unbanked population, remains very high.

Finally, small and medium enterprises that surely are the largest employers, don’t have reasonable access to commercial bank credit at internationally comparable rates. These weaknesses can be addressed by administrative measures and should not take long to implement. An ongoing downturn is a good time to focus attention on these critical issues.