How to counter the slowdown

With GDP growth estimated at around 7-7.5% for this fiscal and at 6% for 2009 the impact of global slowdown on our economy is pretty clear. The revival now depends on how to increase the demand to counter the slowdown. Increasing the demand depends on:
1) Creation of more job opportunities in the country.
2) Restoring the financial markets by getting back the investor confidence.

Let us understand the importance of the above two factors and their impact on the economy.....

Employment opportunities increase when it comes to core sectors like Infrastructure, manufacturing, agriculture etc. The core sectors being highly labour intensive the number of people employed in it will be high. Better the employment rate higher would be the purchasing power. People will start buying and saving more. The buying behaviour would lead to increase in demand and the savings can be re-invested for economic development.

In fact the domestic savings rate which was around 20% in 19991 - 1994 is now standing tall at around 36% for this year. It was the generation of employment (lead by the IT sector in the late 90's and early to mid 2000) which had lead to the increase in demand and the savings rate. However the sad thing is that India which now has the highest savings rate in the world has a very small percentage of this going into the capital markets.

The current situation has resulted in loss of investor confidence. The direct effect of this is the diversion of the domestic savings into more secured options like PPF, FD's and in public sector banks. It’s good that we have a high savings rate but this money needs to be channelized back into the system, primarily through capital markets. This funding in turn will be used to fuel the requirements in core sectors thereby creating more employment and resulting in increasing in demand.

A very big factor which will have a direct impact on the money coming into the capital markets is the focus on corporate governance. This would have to be tightly monitored by the government. More the companies with higher level of transparency in their financials, greater would be the investor confidence. This would in turn pull in a bigger chunk of the savings into capital markets thereby fuelling the entire cycle of growth.