ECONOMIC HIGHLIGHTS                

3 October 2008, New Delhi

India & Global Financial Crisis

NEEW TO REDRAW GROWTH PLAN

By Shivaji Sarkar

The financial crisis in the US and Europe raises a basic question: what about the viability of the Indian economy. Indications are that New Delhi is going to review its globalisation policy. At least that is the signal that emanates from Prime Minister Manmohan Singh’s observation --that it might singe India. A statement contrary to what his Finance Minister P Chidambaram says.

More so, as the crisis according to the US Treasury Secretary and former chief of Goldman Sachs Paulson is the ‘death of raw capitalism.’ In simple words, raw capitalism means promoting consumerism through the credit card culture, without effective generation of wealth or funds. This had led to heavy imports by the US and generated “export-led growth in Asia”, with China, Japan and partially India being the beneficiaries (now adversaries).

Recall, that during the East Asian crisis, India was not affected because its exposure to that market was the least. However, neither India nor the world for that matter has taken lessons from that crisis. At that time, the World Bank had warned that the collapse was due to an artificial real estate boom in collusion with the banking sector. The US sub-prime mortgage, the beginning, was in fact an extension of the East Asian model at a much higher level of exposure and worse, with no safety of funds.

India had a taste of the above a few years ago, when UTI and private banks like the CRB collapsed. Many others had burnt more than their fingers in the stock market scam. Luckily, that has partially saved the banking sector as of now. Though the exposure and thaw in the real estate sector has hit some Indian banks the extent will be known in the days to come.

A strange but common factor is the collapse of the highest-rated Lehman Bank and AIG in the US and CRB a decade ago in India. This raises a doubt about the main credit raters – Standard and Poor’s and Moody’s. Clearly, most Indian companies and the financial sector depend heavily on their predictions. It is time for a review of that dependence. In fact, a major question the US is asking is: whether their predictions are honest or influenced by the beneficiaries?

Importantly, the credit agencies neither took notice of the high-debt factor in the US market nor the greed of the world for money, symbolised by Wall Street. This very greed led to a convoluted financial system derived from buying or trading in credit swap. In turn this led to a bounce in the companies’ balancing sheets when actual finances were clearly shrinking.

Regrettably, India is not free from the system. Many banks dealing in credit cards are very much exposed to it. Besides, it is no secret that with the present high inflation and rising interest rates, the repayments have suffered. But, the market has sought to keep it under wraps.   

It needs to be mentioned that in its latest report, the Reserve Bank has warned: “Credit growth of private sector banks was consistently above the overall credit growth. At times, it also showed wide variations of up to 70 per cent in excess”. Not only does this indicate a grim situation, but it is also marked by high non-performing assets (NPA), a euphemism for losses.

Therefore, it calls for a review of the western credit model, which seemingly “boosts” the economy but at what risk is anybody’s guess. In India, the only saving factor is that credit to GDP ratio was lower than that of developed and many emerging markets. As such, this means the crisis would restrict itself to a small sector, but a vital sector that deals with all the available official money. Thus, interest rate hike is not a solution. Instead, it needs to be lower so as to have the principal amount back into the system. The West had erred on it and India is doing the same by following the so-called global model.

The recent exposure for giants like Tata to the heavy national and international bailing out ventures such as Jaguar, Land Rover and steel companies should be considered a risk to the Indian financial system, which has directly or indirectly funded such operations.

With Europe and the US capacity to buy diminishing, India’s export sector is already facing the pinch. For example, while various car manufacturers were allowed to open their ventures for the dollar-driven market, their exports are not increasing. Hence, it is time to have a re-look at the export-oriented growth model, which has led to negligence in the strengthening of the domestic sector. A high GDP growth is not reflected even in growth pattern.

According to the managing director of Fortune, Andy Serwer, the problem in the US has been no different and is there due to lack of regulation. He is highly critical of the $5-trillion bail-out and terms it as “dumping erring Lehman’s and AIG debt on the taxpayer.”

Apparently, India has to worry on yet another front --exports and outsourcing.  Dependence on other countries to spur the economy has its obvious pitfalls. Integration is fine, but in the Asian context it is dependence on the US and Europe for sustenance! Neither Asia nor India has created a synergy in itself. Exports are falling and becoming less lucrative as the dollar remains at an artificial high.

Nasscom’s prediction about the BPO sector is bound to be off the mark. The $ 64-billion projected earnings (Rs 3 lakh crore), eight per cent of GDP, is not possible. The sector is heavily dependent on the US financial services’ sector, which means that the lucrative contracts for Infosys and Wipro are in danger of drying up. 

The Indian economy itself is hit by high inflation, falling production and demand phenomenon. Both the Planning Commission and the Reserve Bank need to sit together, which they rarely do, to draw up a new economic and growth plan. Indigenous modes have to be tried. It may not be the end of globalization, but it can be remodeled to the concept of Mahatma Gandhi’s swadeshi. No nation can grow unless its own fundamentals are strong with an even pattern of growth. India has to evolve its own economic pattern --- neither capitalist nor socialist. ----INFA

(Copyright, India News & Feature Alliance)