Indian economy will improve by 2010-11

Stating that the impact of global recession will be felt throughout the current year, former Reserve Bank Governor C Rangarajan said the Indian economy is likely to witness recovery in the second half of 2009 and a distinct improvement will take place in 2010-11.

"The impact of the financial crisis will be felt throughout the year with growth slowing down in all developing economies and India's growth rate in 2008-09 would be below 7 per cent as compared to 9 per cent in the previous year. The prospects for 2009-10 also don't appear to be better," Rangarajan said after inaugurating a 'National Symposium on Global Financial Crisis: Impact on Indian Economy' in Hyderabad.

"But, as far as India is concerned, we will see signs of recovery in the second half of 2009. Fiscal 2010-11 will see a distinct improvement in growth," the Rajya Sabha member said.

"The industrially advanced countries are now officially in recession, having had two consecutive quarters of negative growth. It is not known at this stage how long will this recession last and how deep will it be," he added.

"Though the Indian financial system is not directly exposed to the 'toxic' or 'distressed' assets of the developed world, the indirect impact is felt through trade and capital flows," Rangarajan, former Chief Economic Advisor to the Prime Minister said.

Rangarajan said the recession abroad is having an adverse impact on India's exports of goods and services and there is also the impact of drying up of liquidity because of fall in reserves.

"It is necessary for RBI to watch the liquidity situation and take such actions as are necessary from time to time. Reduction of the CRR and repo and reverse repo rates are steps in the right direction," he pointed out.

He said rating agencies in the current episode were "irresponsible" in creating a booming market in suspect derivative products and there was a mismatch between financial innovation and the ability of the regulators to monitor them.

The present crisis calls for co-ordinated efforts of all affected countries, he said adding a simultaneous effort at stimulating the economy will have a profound effect on aggregate demand and various countries must also avoid protectionist policies.

The international financial institutions need to be strengthened in order to enable them to meet the financial needs of poor developing countries badly affected by the crisis, he added.