CITADEL OF SAND; HOW LONG WILL IT LAST?Hello countrymen,
The economic slowdown is spreading like contageon in every parts of the globe. Is it the sign of great depression?
Here is my view in it.
IS GREAT DEPRESSION OF 1930s COMING?
Is great depression is coming? Everyone in the world including in India is asking this question, to which none of the financial pundits is able to answer correctly. ‘Market gurus’ are making wild guess that ‘worst is over, hurricane has passed and settling down process will start soon. But the worst ever crash in at least 15 years on Friday, (likely to continue further also) which was observed as ‘black Friday’ by hundreds of thousands of plundered and ruined investors, belied all such forecasting of economic experts. Dow Jones fell by more than 600 Points, Nikkei by 800 Points, etc. in fact Friday mayhem was caused largely due to crash in Asian Markets. For instance in India BSE and NSE fell by more than 800 and 834 Points respectively on this day. Similarly, almost all stock markets in Asia, like Nikkei, Hang sang, Singapore etc fell sharply. The fear psychosis is such that in spite of repeated assertions made by the concerned governments that the ‘fundamentals of the economy are strong’, the investors could not be instilled with sufficient amount of confidence. The rumour of Banks facing liquidity crunch and probably going bankrupt, was rife and investors as well as common customers thought that whether their money is safe with the Banks. This caused panic in the market and added fuel to fire.
In fact, the beginning of this ‘humungous crisis’ has had started well in 2004-2005 itself in many parts of the world. The artificial boom, the ‘housing bubble’ created by Bankers and property dealers led to over assessment of value of the real estates. The lending by Banks on the over assessed value of properties continued for some time. But when the Bank rates were increased, the borrowers found it difficult to pay the EMIs to the Banks. When, in order to recover the money, the Bankers tried to sell the mortgaged property; they encountered the real problem, because no one was ready to purchase them on the ‘highly inflated’ price. Thus the NPA started accumulating as the ‘non-payment syndrome’ spread like a wild fire. Since many of the Banks had sold many of their shares to other financial institutions, the non payment led to fall in the prices of these shares also. Thus the ‘housing bubble’ has bust.
Banks started getting dry of liquidity due to ‘withdrawal spree’ because news started ‘leaking’ that Bank would not be able to ‘honour cheques’. The Lehman brothers followed by Merrill Lynch and Morgan Stanley had collapsed by now.
It is however, a wrong proposition that had Lehman brothers been saved, the market would have not collapsed. The problem by now had entrenched into the essentials of the stock market itself. The ‘over greed’, becoming billionaire overnight has dried up the ‘spring of business ethics’ almost totally. The desert left is capable of supplying sand and only sand, this contagion has spread globally and even India, the land of ‘Chanakya’ and ‘Megasthanes’ has turned into land of schamsters like Harshad Mehta and a host of such bookies. The ‘blind race’ of minting money resulted into overstretched competition among financial institutions which were unnecessarily exposed to ‘unhygienic business environment’ causing this disease to spread.
Street Wall, the citadel of US economy, had collapsed. Walls were burgled and plunders were in. During Napoleon days it was said that ‘when France catches cold, the whole world sneezes.’ Now it should be said that when thorn pricks the US economy, the emanating pain reaches to whole of the markets including Bombay stock exchange. Therefore; the whole world including European Union, Russia, Japan, Middle-East and India is reeling under acute financial turmoil following the crash in Wall Street.
The situation is somewhat similar to what it was during the ‘great depression of 1930’. The results are similar, so are the reasons.
The great depression of 1930s was caused by a combination of factors like unequal distribution of wealth, high tariff and war debts, over production in industry and agriculture, stock market crash and financial panic. The effects were devastating, like wide spread huger and unemployment (25%), worldwide economic crisis, world market recession and collapse of concept of total free market economy etc.
The political result was defeat of republicans and victory of Franklin. D. Roosevelt (democrat). The history seems being repeated again. This depression is also caused when Bush (republican) is in power. Will it pave way Obama to come to ‘White House’?
President Hoover had said just before the crisis ‘economy is fundamentally sound’ and similarly Mc Cain said ‘the fundamental of US economy is strong’, just before the crash of Lehman Brothers. The American’s ‘war on terror’ has increased the debt by about 79% and is putting enormous economic pressure on economies of many European coalition partners including UK and France. Nobel laureate Joseph Stieglitz say ‘the war on terror’ in an attempt to ‘export American type of democracy’ to the rest of world has cost 3 trillion dollar, three times the GDP of a country like India.
Churchill had said ‘if socialism suffers from vice of and equal sharing of misery, then capitalism is afflicted with the vice of an unequal sharing of affluence’. The continued inequalities in affluence worldwide cannot allow the ‘glass house’ to remain unbroken for longer period.
The hard earned money of citizens of these countries has been thrown and pumped into the unending wars and thus it was bound to have repercussions like those which we see today. The US type of economy and US type of democracy have been exposed once again. How long the citadel of sand will withstand the onslaught of realities. The stock market economy is basically based on the jargons of figures appearing on the computer screens. The bookies and brokers play with the figures and sometimes with the sentiments of investors also. The unethical business tricks are praised as ‘Business mantras’. The wooden pot cannot be kept for long on fire.
Signs of crisis have started making their presence felt everywhere including USA and India. According to the data released by the Labour Bureau of US, about 7, 60,000 jobs have been cut by now, 1, 59,000 in September itself. Results are devastating, American psyche has shaken, so did the essentials of the economy. The US administration hurriedly came out with a rescue package of 700 billion dollars. The troubled asset rescue plan (TARP) is introduced to save the economy. Other European as well as Asian countries have also come out with similar rescue or what they called ‘Bailout package’ plan to save the market and especially financial institutions. But there was no concerted and well-coordinated financial effort by the European Union as such.
In fact, G-7 leader began a meeting in Washington late Friday, to find common solution and propose concerted and coordinated steps in order to fight the menace jointly on global level. But despite several rounds of talks, no consensus could be arrived at. The concept therefore; of a ‘politically and economically unified Europe’ collapsed like ‘wall of sand’ and ‘myth of liberal democracy and export of American democracy’ seems ceased to exist.
Every individual European country was taking steps on its own and for its own. If total bailout packages are summed together, it comes nearly about 3 trillion dollar. See the chart-
Country Bailout package
USA 700 billion USD in one go, total 990 billion USD
RUSSIA 86 billion USD
UK 32.5 billion USD, revised 876 billion USD
GERMANY 50 billion USD
BELGIUM 16 billion USD
IRELAND 752 billion USD
IRELAND 864 billion USD ten times its total GDP
FRANCE 237 billion pound
INDIA More than 60,000 Crores in form of CRR cut by R.B.I.
But even after this heavy dose of financial injection into the ailing economy, after initial hiccups, these efforts to stem financial markets and specially Banks dipped in the quagmire of crisis. There is stampede everywhere and panic has gripped the entire globe. According to figures made available, the total amount involved in the rescue package in Europe and America only, is about 1.8 trillion dollars, which is almost equal to double the GDP of India, which is about 46, 93,602 crores. Magnitude of crisis is such that Iceland is in foreign debt ten times its GDP. Just imagine the madness on part of the governments, sheer madness. The mad rush for conspicuous consumption and show off tendencies destroys not only individuals but Nations also.
Well tide would pass after some time, but leave the scares of devastation in the psyche of millions of people across the Nations. Questions that should be asked now, that whose money is being ejected into the economy? Did the governments take mandate for this package? After all why the tax payer’s money would be pumped into the financial markets to save it from, what they call financial tsunami, a problem or a crime which someone else have created. Is it a bailout package for Nation of or bailing out some economic offenders? Does it not sound unjustifiable that, why innocent citizen pay for the offence he or she has not committed? Will it not set in a new but dangerous trend in the economy of the world?
IMPACT ON INDIA- Man Mohan Singh said in Marseilles that Indian economy is not immune to world economic meltdown, but ours is strong fundamentals. Chidambaram also is in resonance with the PM. But the fear is visible. Market broke a news, though not confirmed by the authorities that ICICI Bank is facing acute ‘liquidity crunch’ and suddenly share showed the signs by being plunged. The Bank authorities were quick to comment, ‘we are having enough of liquid with us’. In India, we believe in reading in between the lines, when govt say they have the majority, we believe that there is serious problem with the govt, or else why should it shout like this. This is what seems to have had happened with this Bank, because last Friday its share fell and fell sharply.
REASONS WHY INDIA WOULD GET AFFECTED-
1. With the globalised economy, the ripples in one part of the world are bound to create hiccups in other parts. The world is a global village and therefore; the Indian economy cannot remain immune to what it is happening in the other parts of the world.
2. IT-BPO sector of Indian Industry has emerged like world giants. Infosys, Wipro, TCS, HCL etc have made a room for themselves in the world market. Hyderabad, Gurgaon, Bangalore, Pune and a host of such cities have gradually metamorphosed into cyber cities. These cities are fast becoming out sourcing centres. According to one estimate, about 15% of the IT professionals in USA come from India. The cutting of jobs in this sector in Europe and America would have disastrous consequences in India also. IT and BPO are likely to be hit hard. ‘Guys on the bench’ are getting ‘pink slip’ by many MNCs in cities like Delhi, NOIDA, Bangalore, Pune, Hyderabad etc. India is becoming an attractive market of ‘soft ware outsourcing’ for many foreign companies. They get cheaper but decisively better ‘software guys’ to word quickly for them. IT-BPO revolution began in India somewhere in early 2000 and gradually changed the Indian face abroad. Over a period of time, the export of this sector increased by 33.5% amounting to 8.4 b USD in 2007-07, it is expected to reach 10-11 b USD by the end of 2007-08. According to National Association of Software and services Companies (NASSCOM), the number of employees working in BPO-IT sector in India is under-
Year Number of employees(IT-BPO)
2003-04 2,16,000
2004-05 3,16,000
2005-06 4,15,000
2006-07 5,53,000
The current figure is certainly much more and is increasing day by day. They were getting salaries worth 1 b USD during the year before last year and naturally it has increase substantially in 2008-09. According to one estimate, about 82% of US software companies prefer Indian software professionals for obvious reasons. The humungous fall in Wall Street leading to unprecedented panic and catastrophic consequences in American industries would certainly affect this boom. The exact figures would come only when this financial tsunami is over. Nonetheless, it would certainly mean job cuts and increase in unemployment rate.
3. Trade and commerce- USA is the largest trading partner of India. Share of USA in India’s export is 17%, and its monetary value is more than 100 billion USD. This economic meltdown would certainly adversely affect India’s export in general and export to USA in particular. According to Federation of Exporters Association (FOE), the exports from India are already showing signs of decline due to this slowdown syndrome. Figures suggest that it is experiencing a decline of more than 15%. According to one estimate, the NRIs remittances in India during 2004-05 had been about 22 b USD, out of which 60% comes from Europe and North America and rest 40% from Middle East. These remittances are definitely going to decelerate, if not stopped; contributing to depletion of FOREX which had reached all time high in recent years. The remittances coming into a country is a healthy sign and no country however strong it may be, would like it to grow substantially. If we look at this figure of inflow of foreign exchange flow into countries during three to four years ago, we can imagine that why and how our FOREX has swelled to nearly
200 Billion USD.
Countries FOREX( from IT-BPO)
India 21.7 billion USD
China 21.3 billion USD
Mexico 18.1 billion USD
France 12 billion USD
Philippines 12 billion USD
Pakistan 3.9 billion USD
Bangladesh 3.4 billion USD
4. This economic slowdown is not going to affect much more immediately to our overall economy but the consequential effect would manifest in deceleration of pace of economic after sometime. The Deputy Chairman of Planning Commission, Montek Singh has also apprehended that the growth rate would slow down to 7.5 and 8%. The industry and other sectors are also witnessing the same down ward trend. In fact Industrial growth slumps to 1.3%. There are some more perturbing figures in economic arena, but these after effects are not going to create situation like what it is in Europe or America.
5. The crash in stock market is very much perceptible. The
BSE and NSE Sensex have fallen from more than 21000 in January to less than 11000 in September, 2008, registering a fall of more than 50%. As mentioned in earlier paragraphs, this fall has led to panic in financial markets. India stands at different platform vis-a-vis other economies following American type policy of lasez fairre in the sense that ours not a totally unregulated economy, even after we have eschewed the Nehruvian socialist economy in early 90s. As a matter fact, the total free and unbridled type of economy has resulted into this ‘financial catastrophe’.
6. Stock markets constitute 15% of the total capital in India, therefore; this tsunami in the financial market worldwide is not going to be a contagion for all financial institutions including Banks. But if the situation is not handled with ‘utmost care’ it would infect ours also with greater degree of damage.
WHY INDIA STANDS AT DIFFERENT FOOTING AS COMPARED WITH EUROPE AND AMERICA-
When financial turmoil hit American followed by European economy, the anxiety in India was natural. The government acted swiftly as it should have acted. First thing which is very important under such situation is restoration of confidence and prevention of rumour mongering. Both PM and FM made calculated and balanced statements which was first right step in right direction. But unfortunately the rumour mongering has not yet stopped. Ours is not an unbridled and unregulated financial stock market. Moreover, the percentage of financial markets in the economy is 10-15% which is meager as compared to other sectors of the economy. Here are some constituents which make our economy different from many of others. Well, it would be a wrong and utopian proposition, therefore; only an etourdi can say India shall remain totally immune from this financial meltdown, but certainly the impact will never be of that magnitude as they are in the economies of laisez fairre. Reasons are obvious-
1- Indian economy is still agricultural based and the contribution of agriculture to GDP in India is decisively higher than any other countries in the world.
Countries % in GDP
INDIA 20-24
CHINA 13-14
BRAZIL 8-9
SPAIN 4-4.5
AUSTRALIA 3.8
MEXICO 4
S.KOREA 3.3
CANADA 2.2
FRANCE 1.0
ITALY 2.1
JAPAN 1.1
USA 1.0
GERMANY 0.9
UK 0.5
HONKONG 0.1
Thus it is clear that agriculture still contributes quarter of the GDP, rest 50% and 25% are contributed by services sector and industry sector respectively. This is perhaps one reason why PM, FM and RBI say that the fundamentals of our economy are strong. The upheavals in the financial markets have very little to do with rural economy.
2- Indian financial market especially Banks have always been under RBI scanner, even during normal times.
Banks % share
Public sector Banks 75%
Private Banks 18.2%
Foreign Banks 6.5%
Thus it is clear the role of private Banks as well as foreign Banks vis-à-vis Indian economy is very limited. Even the lending by these Banks has been dismal. In fact CD ratio of such Banks speaks that they are interested in deposits and not in lending. The 196 different Regional Rural Banks (RRBs) play a vital role in rural economy of India would remain by and large unaffected owing to this depression. We have a chain of banking system based still on concept of welfareism rather than profitism. The Urban (52) and State cooperative Banks (16) have been playing significant roles in making ‘fundamental our economy’ strong. We have had developed ‘a scientific fiscal mechanism of consistent monitoring’ system for our banking system which would keep our economy safe in extenso, when the world’s economy is in extremis.
3- Post offices are poor man’s Bank in India, started in 1850s still plays the role of ‘unsung heroes’ in capillaries of economy. The chain of more than 1, 50,000 post offices in India contributed to about 49.37% in overall revenues in 2004-05. What a significant role they are playing. Common men, pensioners and small domestic savings still prefer post offices for one simple reason, the high rates of interest rates in comparison with any other financial institutions. The government and RBI therefore; must nota bene on post offices and should not be swayed by media hypes on this issue. After all the 60,000 crore money that has been injected into the market, is the hard earned money of millions of tax payers, and why and how would they pay for economic offence, they never committed?
4- We have had developed an ‘iron jacket of social security system’ for the people sitting at fence, a step which Roosevelt took after ‘the great depression of 1930s’ in form of
‘ new deal’ and which many developed nation are taking as an emergency measures. Welfarism for us is a mission, for them it is fiction. Ours is a ‘democracy with humane face’ and not an ‘export brand democracy’, thus, it is a sermon also for those who want government to ‘throttle the accelerator of liberalization’ with much more intensity. It would cause, what economists say ‘overheating of economy’, bravo! We would certainly win the race. Don’t let loose the heart and patience.
