Economic Highlights

New Delhi, 7 August 2008

Global Economy Woes

SAY NO TO IMF, WORLD BANK PRESCRIPTION

By Shivaji Sarkar

Global integration is exposing India to global problems. A decade back India was insulated from the crash that had engulfed the Southeast Asian tigers, in its neighbourhood. Now developments in far off  US are hitting the Indian economy! It is slowing down.

The slowdown, almost recession-like situation, in the US and some parts of Western Europe has Indians packing back home. This will further pressurize the economic outlook as well as the job market. It is already showing signs of cracks in the real estate, manufacturing, exports and all other sectors. Even the Bombay Stock Exchange share is losing its sheen.

In its earlier rating of the Indian economy, the international rating agency Moody’s Investor Service has only supported the contention. It says that risks confronting the Indian economy have grown amidst political uncertainties, higher Government borrowings and rising prices. It has warned that India’s sovereign ratings could be lowered from the current “stable” outlook. In the late 90s, the Asian Tigers ratings too had been lowered. However, oil prices were not as volatile then.

Earlier, rating agency Fitch had lowered rating outlook to negative from stable. Standard & Poor (S&P) has also issued a stern warning. The agencies have said there are pressures to India’s external accounts due to the risk of fiscal spillovers. Such spillovers, if huge, could weaken the gap between foreign currency and the local currency ratings – the rupee may further lose its strength.

Moody’s says if the fiscal policy response remained inadequate amidst heightened external shocks or results in inflation, then ratings pressure for change in India’s outlook to negative would increase. A rate downgrade, what is known as back to speculative grade, would divert international investment. This would mean a further crunch for infrastructure and all other sectors. Investments are the cheapest funding. If these dry up, borrowings are bound to increase.

The Reserve Bank has stated that the external debt increased by $ 51.5 billion, 30.4 per cent, to $222 billion at end March 2008. Indian companies are not getting investment so they have resorted to external commercial borrowings at higher rates. Conversely this has made financing expensive and would lead to a serious situation in the days to come, particularly as the sales are also on the downslide owing to credit squeeze and high interest rates.

This is an international – IMF, World Bank -- prescription to the RBI for soaking up the extra money in the money market. It is having devastating results on the entire economy.  The RBI needs to think of de-linking and devising a more realistic India-centric economic policy of low-interest regime. Its international, rather West-looking, policies would subisidise the western economy alright but would, in fact has started creating havoc for the domestic players. The so-called anti-inflation steps are adding to the miseries, not only of the average Indian but so also of the large corporates.

The Mall boom, again with public money, is apparently busting. The occupancy is poor. The footfalls, buyers, are falling. “The dynamics of the mall segment have changed in the last few years, as there is an oversupply of retail space. With a fall in footfalls, the retailers are finding it tough to drive in the customers to their malls”, says Anuj Puri, Chairman, Jones Lang La Salle Meghraj (JLLM).

The World Bank in the late 90s had diagnosed the Asian Tiger crisis to large real estate constructions and mall boom. It had also hinted at a possible nexus between commercial bank officials and developers. India is seemingly into a similar situation.

With most malls offering lease terms of six to nine years and retailers being locked in for two to three years with high initial investments and rental costs, the operation break-even has now been overstretched. It means sustaining losses for a longer period with little assurance of a return, especially for small retailers. This may mean the closure of many retail and back-chain production units.

The job-chain is also getting affected. High-end jobs are drying up. Even the low-end ones are difficult to get. The ICICI, has during the past few months sacked over 1,000 Executives “for poor performance”, euphemism being used to justify the company action. Now even retailers like Reliance Retail are resorting to “staff rationalization”. India Bulls and Future Group have fired Executives. According to retail industry experts, it is for the first time that the middle and senior-level Executives are being laid off!

Recal, that the Asian Tigers also resorted to large job cuts and sackings when they faced the crisis a decade back. Much of the so–called boom and subsequent bust - in Southeast Asia had come with the opening of the market to global players.

Interestingly, mutual funds are supposed  to be comparatively insulated from volatility. Of late, assets under management (AUM) have dipped-- by about six per cent. The top fund house, Reliance Mutual Fund was hit the most with decline in AUMs over Rs 6,000 crore. This is a result of the downturn in the stock market leading to erosion in the value of mutual fund units. This apart, high interest rates have prevented banks and corporates to park their surplus cash in income schemes leading to withdrawals of funds, explain fund managers. Instability in the market prevents foreign institutional investors as well.

Clearly, the outlook is not bright. Global integration has made it possible to own up liabilities of other countries. Global players come when the going is smooth. When it is tough, the domestic players take the battering. The most sought after level-playing field eludes the small and big domestic companies in all sectors.

Thus there is need for a thorough policy review. Globalisation cannot and should not be for the loss to its indigenous people so that global predators can thrive. In our case, it has happened in all sectors of the economy. The RBI, finance, commerce and industry ministries need to reformulate the policies not for the sake of inviting the so-called FDI, which according to the RBI has raised India’s external liabilities several fold.

The Government needs to create policies where financing is low-cost. This is the sine qua non for putting the economy back on rail. Soaking money out of the system, as suggested by Economic Advisory Chairman C Rangarajan, former RBI governor, would further aggravate the disease. He has brought down growth projection to 7.5 per cent.

The country needs to upgrade its growth prospects. Lower financing at high costs, as has been the norm in this country for decades, would only retard it. India needs to evolve a growth and financing pattern that is different from the IMF and World Bank prescription. Unless this is done, the prospects would remain dismal. Clearly, the global dip has caused a most difficult situation at home.--INFA

(Copyright, India News and Feature Alliance)