Economic Highlights

New Delhi, 11 August 2011

India And US Debt Crisis

VITAL TO CHART INDEPENDENT PATH

By Shivaji Sarkar

The US debt crisis and lowering of its credit rating should be an eye opener to the UPA Government.  Whereby, India needs to chart out an independent economic course. It has to revive the Nehruvian spirit on this 65^th Independence Day, if it wants to recapture the eminent position it enjoyed during the hey-days of the Non-Aligned Movement which was the country’s strength.

Prime Minister Nehru though enamoured by the Soviet Union and having close ties did not adopt the system of fully controlled economy nor did he try to ape the West’s fully free economy. He opted for mixed economy and enshrined non-alignment as the bedrock of India’s foreign policy. This stood the test of time when the Soviet Union collapsed and India’s economy could withstand the jolt with the least shock.

As the world became uni-polar, the Government and the Opposition decided to shed that unique position to integrate with the US-led western system. Gradually the country became even dependent on US growth to chart out its own growth parameters.

The spectacular collapse of the global financial system --- the Lehman moment ---- in 2008 led to the deepest contraction of world economy since the 1930s. This started changing the Indian economy also. The integration and dependence on the US economy has led to a slowdown that India could have avoided.

Our banking system, known for its resilience is now in shock mode. The non-performing assets (NPA), losses or bad loans, are rising critically. Thus, it becomes difficult to take solace from Union Finance Minister Pranab Mukherjee’s statement that the situation is grave but there is no need to press the panic button.

Undoubtedly, there is every reason to panic. Inflation is going through the roof. Foreign direct investments (FDI) are falling. Industrial and manufacturing growth is stunted. The leading servicing IT companies, functioning as US and European out-sourcing agencies are taking a beating. Many foreign out-sourcing companies have closed their operations here.

More worrisome is whether the last Budget and the statement of the Finance Minister heavily hinges on the sinking US to sustain India’s growth. The Budget projection relied on hopes that the US would stay strong pulling the world economy along with it.

India needs to learn from the global sell-off in equities which is worse than the situation after the Lehman crisis. The US along with Euro zone, suffering from severe sovereign debt crisis, is leading the world to a double-dip recession.

It is an irony that large multi-national corporations (MNC) are still islands of prosperity. How long they would be able to sustain their large profits remains to be seen. Their growth despite contempt for national sovereignties is spurred by the US and European Government’s expenditures made through heavy borrowings. The stranglehold of MNC lobbies on Western Governments has led them to protect and promote their interests.

Arguably, many want us to believe that the US debt situation is the creation of wrangling between the Republicans and Democrats. Had that been the case, US ratings would have lowered long back. As the debt ceiling has been raised 68 times since 1960, and its increase was considered routine until this debate.  Now no American thinks it to be a routine affair and wants the Government to tighten its belt, much to the MNCs’ chagrin.

As the Barack Obama Administration has agreed to an expenditure cut, this is likely to affect the MNCs’ profits. Given that the US borrowings were virtually going to feed the MNCs’ for armaments to sustain the ‘avoidable’ war in Iraq, the US-NATO-European Governments’ involvements in the  Chechnya, Georgia, Libya, Tunisia, Egypt and the Arab world operations as also food, water and other mundane necessities supplies to keep the soldiers “happy”.

Clearly, the US expenditure cut would tell on the MNCs’ health. As it would further affect FDIs to India. Bluntly, large US borrowings had been providing funds to MNCs with spare money to invest in countries like India and China. This source is drying out now.  And, might have serious impact on the supposed engines of growth ---- India and China. The Chinese situation could become more serious as it has invested about $1.2 trillion in US treasury bonds. In all likelihood, its maturity time would be extended thereby blocking large Chinese funds.

India might have to worry more. The US spending compromises would affect its global security operations gradually. As it stands Washington has started pulling out of Iraq and has a road-map for a pull-out from Afghanistan. It might also gradually reduce its involvement in the Indian Ocean and Middle East regions.

Importantly, all this would put pressure on New Delhi to spend more on security-policing and defence operations for which it now depends on the US. Be it to keep Pakistan and China under check or create a security buffer in the Indian Ocean region.

Further, it could strain the Government’s finances at a time when it is facing a severe revenue shortage as stagflation has resulted in reduced tax earnings. Another problem India has to tackle is that its credit rating, even after downgrading of US credit rating to AA+, is many notches below that at BBB minus, lowest investment grade.

Needless to say, this calls for setting a politico-economic independent path. By hinging on the US economy as many recent agreements show it would result in giving a new lease of life to US and European nuclear power companies, large retail outlets and other operations, which might not do anything for India.

Also, notwithstanding Pranab Mukherjee’s statement of ‘no need to press the panic button’ as India can manage today, but as the scenario develops, it would not be easy for India to maintain its financial strength. The US is bound to shrink, if not sink, but India needs strong independent strategies to keep it afloat and maintain its regional supremacy.

In sum, the Nehruvian spirit has to be imbibed to chart that course. If the finance mandarins sitting in the Government do not do that the Opposition has to lead the path. This is a critical phase and the world looks towards India to chart a new path and rescue it from the failed Western models. ----- INFA

(Copyright, India News and Feature Alliance)