Economic Highlights

New Delhi, 14 November 2008

End US Hegemony

CHART NEW GROWTH MODEL

By Shivaji Sarkar

Mindless global integration and irresponsible US economic behaviour is affecting everybody. The economic scenario in India is getting worse every day. The time has come for the world to de-link and end the US economic hegemony. This also means liberation of the financial system from the stock market.

The American extravaganza of mounting the world economy with its debt is affecting fledgling economies. India is no exception. Exports, industrial production, housing prices and employment are falling. Even estimated assets of billionaires are heading south.

Not only that. India’s foreign exchange reserves have shrunk by $ 63 billion to $ 253 billion. In October alone the reserves reduced by $ 31 billion. After touching a record $ 316 billion on 23 May. The trend has not stopped and if this continues it could lead to a severe exchange problem a la 1991 style.

Worse, unemployment is on the rise. It is likely to go beyond 11 per cent. It is estimated that about 2.5 lakh to 3 lakh jobs would be lost in the coming months. Some like Tata Motors, Ashok Leyland and Mahindra and Mahindra have already sacked about 5000 regular and casual employees. Nasscom is beginning a discussion with the software industry on laying-off workers.

On its part, the US has lost $ 8 trillion worth of wealth. Germany has announced that it is in recession. The President of the German Federal Financial Supervisory Authority Jochen Sanio said, “We are still licking the wounds of Lehman. It caused $ 300 million damage outside the US”. German experts say that Germany would not see any growth next year.

In UK, the Bank of England said, “The economy probably had entered recession in the second half of 2008 and output is likely to contract further”. Sending oil prices tumbling down. Other official figures show that British unemployment jumped to an 11-year high of 5.8 per cent.

In Asia, the Japanese consumer confidence has also hit a record low. Japanese exports tumbled in the first 20 days of October as a stronger yen and global slowdown took hold. The industrial output fell sharply in 15 countries that use the euro currency in September.

One of the Bretton Woods architect Jacques Polak of the Netherlands squarely puts the blame on banks for driving the world to recession. He obliquely hints that the investment pattern of the banking sector --- over reliance on the stock market --- has led to the global credit crisis. The Bretton Woods system was based on fixed exchange rates tied to gold reserves and the dollar. It was based on the price of gold fixed at $ 35 an ounce. It meant that an equivalent amount of gold would be kept as reserve by the US Government. However, the US quietly did away in 1971.

But the world continued to carry on with the dollar reserve system. The system worked in favour of the dollar as all other currencies were floated against it in a so-called open market. In fact, the problem had started accentuating during the last ten years as the US started a severe debt system.

Trillions of dollars were pumped in to create an artificial money syndrome. Debt was financing every investment without seeing whether it was secured or not. Bluntly, debt has been the rocket fuel that propelled the US growth for the past decade. The financial institutions were made to pump billions in Wall Street papers --- the stock market, without caring to see its intrinsic value. The US deficits were high and unsustainable.

This is where Indian economists since the liberalisation had started faltering. They had projected the US and the stock market as the model sending the Indian stock market to dizzy artificial heights. They encouraged financial institutions and banks to invest in these junk papers leading to losses of over Rs 200,000 crore of public money. If the present crisis were taken into account it would be approximately another Rs 50,000 crore.

Clearly, the world, India particularly, needs to be cautious on its ways. The dollar is bound to decline, slowly or dramatically. The current rise of the dollar is temporary due to technical factors connected with the carry trade. Once the dollar loses its shine, traders would stop accepting it. It may lead to a worse crisis for countries like India and China, which have huge dollar reserves. The correction time has come and the Reserve Bank needs to begin the alteration.

Additionally, our economists need to look for a pragmatic investment policy as well. The stock-based economy has led to less investment in the infrastructure and core sectors, wherein long-term goals were replaced by short-term profit-oriented risks. It meant more losses to the people. That was neo-liberalism. It lies discredited for its obvious manipulative systems. Had India not adopted this part of liberalism, it would not have seen the crisis it is facing.

Today, we need to chart out our own course junking fast growth to sustainable long-term growth. Towards that end, we need to enact two laws. One, to check the Government from giving bail-out packages to reckless loss makers (rewarding the unruly players). Two, to ban financial institutions, pension funds and banks from investing in the stock market instruments. We also need to lower the interest rates and make the banks work on a low spread by cutting their extravagant ways.

Another step required is to boost the purchasing power of the people by reducing taxes of all sorts, starting with income-tax, to promote domestic consumption. Especially as exports are not a solution for growth. Japan and China are experiencing it.

Importantly, India needs to stop being a meek supporter of the US line with its belief in the market’s magic. Much of the Indian economy has been saved because of the reticence of those who are termed as swadeshi conservatives. They speak the same language whether they are Leftists or Rightists. The Government economists need to learn from them and correct its ways to end the US hegemony. ---- INFA

 (Copyright, India News and Feature Alliance)