Prime Minister Manmohan Singh emphatically told the nation there was no place for fear because of global financial uncertainty, and assured bank depositors their savings were ?entirely safe?. He spelt out the government?s stance on the liquidity crisis, offering a frank assessment that growth would slow down ?temporarily?, but that inflation would also come down.
Singh?s statement was received well by the markets, which read into it further measures like a relaxation in credit limits by banks to mutual funds and non-banking financial companies (NBFCs), as well as another round of rate cuts. The BSE Sensex ended up 247.74 points on Monday.
The suo moto statement by the Prime Minister in the Lok Sabha caps two weeks of sustained intervention by the finance ministry and RBI in the credit and stock markets to ?minimise the impact of the financial storm?, as Singh put it.
Enumerating the slew of steps taken by the Centre in recent weeks to infuse liquidity into the banking system, the PM said his government is conscious of the fact that it is not enough. ?The liquidity must translate into expanded flow of credit to industry, trade and business. Suitable advisories have been issued by RBI and the ministry of finance to the banks to ensure that borrowers are provided adequate credit, including export credit and working capital,? Singh said.
?Banks must also provide adequate funds in the form of investment or credit to mutual funds and NBFCs,? he said. The statement is significant as it means Singh has not left any room for distinction between state support to public and private sector entities.
To ensure that there is no disruption in economic activity due to the liquidity crisis, Singh said: ?Both RBI and the government are carefully monitoring the flow of credit and will ensure that the additional liquidity infused into the system translates into actual credit. We will not hesitate to do more if needed.?
The PM said though the depth and duration of the global slowdown remains uncertain, ?We must be prepared for a temporary slowdown in the Indian economy.?
Pointing to the decline over the last three weeks in the wholesale price index used to denote inflation, Singh said the current rate of 11.44% is still high but the government expects a further reduction in the next two months.
Urging lawmakers and citizens to have faith in the Indian economy?s fundamentals, the PM said, ?Our effort will be to minimise the negative effect of the financial crisis and, once the global situation stabilises, to return to the growth trajectory of 9%.?
Stressing that the Indian banking system is not directly exposed to subprime mortgage assets and its positions on other problem assets are ?minimal?, the PM said the global turmoil has led to a contraction in other forms of commercial credit like external commercial borrowings and international suppliers? credit, triggering a liquidity crisis in the system.
Calling for ?unity of purpose and resolute action? to overcome the current challenges and possibly convert them into an opportunity like India has in the past, Singh pointed to the stepping up of public expenditure in this year?s Budget in anticipation of a slowdown as a source of comfort.
?Our expenditure proposals were criticised at the time in some quarters. But I am happy to note that it is now widely acknowledged that increased public expenditure is an important part of the solution. Our expenditure on education, health, NREGP, NRHM, AIBP, JNNURM and other programmes will, I believe, stand us in good stead in these difficult times,? Singh said, adding that the Rs 65,000-crore debt waiver package for farmers should also enthuse them to boost productivity.