Comment

Surjit Bhalla, chairman of Delhi-based Oxus Research and Investments, has been an outspoken free market advocate for years now. But even he sounds shocked at the Wall Street meltdown and confesses that he did not expect it, nor did anyone else on the planet either. But he does think that India’s current woes are largely due to bad policies on the part of the government and the Reserve Bank of India and only partly due to the global financial crisis. He points out many misconceptions about the situtation to Parsa Venkateshwar Rao Jr

What do you think of the government’s steps to instil confidence in the economy?
Well, they have just begun and honestly, they are a bit late. I think the cut in the CRR (cash reserve ratio) by 150 points is a welcome one, and in the right direction. However, we will be fooling ourselves if we think this is by any means near enough to what is needed. Taking the Index of Industrial Production (IIP) for August, and this is one month before the outbreak of the financial crisis, we are faced with two problems.
One is the global financial crisis, and the other is the economic slow down.Nowhere in the developing world has industrial production fallen so much. The government must find out the reasons for this. In my view it is the unnecessary tight monetary policy that was followed by the RBI.

It was anxious about inflation?
Well, I think it was a completely misguided policy. It was meant to fight inflation. Wemight as well say it was meant to fight motherhood. It was not an appropriate goal. The decision-makers must look at what has happened and why. Once they do it, appropriate policies will follow. The tight monetary policy was reckless.

Erring on the side of caution?
It is one thing to be careful. It is another to drive at 10 miles per hour on a highway. That is recklessness. I think the government has been reckless in its fiscal policy. Six months ago, the finance minister announced a new capital gains tax. I wonder how much capital gains tax they are collecting now. Then there is the commodity transaction tax, which fortunately was not implemented. There were other taxes like the fringe benefit tax (FBT).The fiscal policy was somewhat irresponsible. The oil policy, the disguised way in which it was operated, has been reckless.

Are the financial institutions in the country in some sort of danger?
I don’t think so. I hope not. It’s fair to conclude that they are not in danger because they were not allowed exposure to the toxic derivatives. The financial institutions in the West are in danger. We are fairly integrated in the global system but it would not be right to conclude that because institutions there are in danger, institutions here are too. That would be carrying the integration argument too far.

How long before the global crisissettles down in some sort of way?
The credit and stock markets have gone out control in the last 10 days. These are the 10 days that shook the world. Stock prices in the West have declined by 25 per cent, a record. I think the quarter from October to December 2008 will hit the bottom, which we hoped we would never see.

Does India face a recession and job losses?
Yes and no. Job losses are already there. The world environment is at negative infinity. It cannot be worse than this. Will the next quarter be worse than this? I do not think so.

What should our government be doing to face up to the situation?
In terms of policy I would have a multi-pronged approach. The CRR needs to be brought down by another 300 basis points in the next couple of months, starting next week. Interest rates, the repo rates, they need to be brought down by at least 200 basis points. There is case for a sovereign fund. The Hong Kong Monetary Authority had such a fund in 1998, and it ran for two to three years. It was disbanded after making a 200 per cent profit. It should be for buying stocks in the domestic market. There are enough reserve funds to do that. I think it is logical for the dollar to be at Rs49 as it was illogical for it to be at Rs39. The Government is doing the right thing, the only place where it is right, is not allowing the rupee to fall. There are two things needed.
Confidence and liquidity. The people, investors, savers should be facilitated to go about their daily business. That is what has stopped. There is a need to restore confidence. All over the world, CRR has been cut as well as interest rates. We have not cut interest rates here. That has to be done.

What are the tips for investors, especially small ones?
My advice is that in the last 50 years there has not been a better opportunity to buy. To those who have bought and suffered, stay invested. Those who have been lucky enough not to have bought, it’s time to buy.