1. (D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this
column are his own)
By D. H. Pai Panandiker
The collapse of Lehman triggered the world financial crisis this time last year. Stock
markets crashed; credit was frozen and banks were scurrying for cash; crude oil
prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment
and income. With the inter-linking of economies no country escaped these drastic
consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to
recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down
reserves. The rupee fell 20 per cent, industrial production declined and exports
slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since
they did not have much international business. Besides, the regulations of RBI did
not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to
avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing
excise duties and increasing investment in infrastructure. The RBI did pump in
liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has
started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will
weaken in future against other currencies. RBI has a large part of its foreign
exchange reserves in dollars and should therefore change the composition of
reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially
sound on their own. Therefore the capital base of banks has to be sound and
conform to the new Basel standards. Banks should be modernized and to attain
economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be
coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments.
The financial crisis was to a large extent spurred by financial instruments like
Collateralized debt obligations (CDO).

2. Fifth, RBI should keep constant watch on liquidity requirements. The financial system
in the U.S. would have collapsed but for the timely release of cash by Federal
Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and
continue to take steps to open up the economy, whether in respect of trade,
convertibility of the rupee, external commercial borrowing and foreign investment,
since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is
time to reform the system to enable it function smoothly and efficiently under good
supervision.
(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@gmail.com)