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| Nations in distress | | | Lalit Sethi
Is India 's economy in trouble, deep trouble? Perhaps not just yet, but with the world economy bleeding, could India be far behind? With many parts of the world facing problems, economic and others, could India be an exception? It might well be claimed that India is not yet in the crisis mode, that a resilient India is trying hard to fight back and facing the difficulties courageously and stay above water, float and dourly manage one new problem after another and be ready to stand up to cope with the next set of woes.
The deep economic problems are not of India 's own making, but their origin lies far from its shores, across the Atlantic Ocean. What India is facing is the result of somebody else's doing. But it could be reasonably argued that India was enjoying the sunshine and glory when the world was having a picnic of sorts and the bounties were coming to this land of a billion and more people, at least one-third of them or much fewer, even as one-third of those very poor were and are still languishing, starving and possibly miserable.
It is being repeatedly claimed by Ministers and officials that India 's fundamentals are so strong that there is little to worry, but that is no longer the case. There is now a feeling of urgency about economic issues.
At first, the troubles were being blamed worldwide on the rising cost of energy, especially petroleum, with crude prices having risen early this year to $147 per barrel, but even though the prices dropped at the end of October to $60 and now around $70, after production cuts by the exporting countries' cartel, energy cannot be the sole reason for international economic crisis. Its roots lay in the reckless lending by the banks in the US to sub-prime or undeserving borrowers for housing to create an artificial boom. The devil-may-care lending spree pushed up the stock markets to dizzy highs and the Bombay Sensex was close to the 21,000 mark before this year's Budget in February, but after that began the cascade and the veil of confidence began to vanish with every passing day. The fear is that foreign investors, who have withdrawn $12 billion from the stock markets in the past few months, could withdraw a similar amount in the next few months and send Indian markets to a new tailspin.
The lobbies of excessive liberalization and globalization to make India shine more than ever kept pushing for complete free market like the rest of the world, but Indian rulers have resisted free convertibility of the currency for nearly two decades, and it is now clear that this wise checks and balances in the banking and financial industry were kept in place even though financial entities in the public domain or owned by the government were allowed to dilute their equity, but not mercilessly. By dilution of State ownership, only more capital was generated to increase their monetary adequacy rather than risk free operation. That is why the banks are possibly still not in crisis mode, though many new facts of their exposure to unsafe lending and borrowing, especially by a large number of overseas branches and their growing inability to repay are beginning to tumble out of the cupboard and coming to be known to the people at large.
Experts feel that India's large foreign exchange reserves should be partly used to help out the Indian banks in world markets to honour their obligations, at least opening a window of $4 to 5 billion in a sort of safe operation, but India's foreign exchange reserves, which were $300 billion, or thereabouts last year, are now down to $270 billion. But banks are the only claimants to that kitty. There are big corporations eyeing that pie as well. Corporate entities, which have been on a buying spree of overseas companies, including luxury car making outfits in Britain , have also to honour their commitments. But who is going to bell the cat? Will they be able to raise resources from their own hotels and other outfits to repay the fancy debts? Time will tell. Even as stock markets continue to fluctuate, sometimes up in big bursts of confidence, but mostly down, as brokers and investment experts advise people with cash to spare that this might be a good time to buy into sound companies at a bargain price and look for profits at a distant or not so distant future, the news on the export front is bad even as imports rise and the rupee value losing ground against the major currencies, India's trade deficit has shot up to 53 per cent to a new high of $60 billion for the half year of 2008-09, the Prime Minister has appealed to industry not to cut jobs and avoid knee jerk reactions. He has promised financial stimulus and incentives to industry. Bank interest rates have been cut a little and they have been asked to lend more to the industry, but the banks are reticent as there have already been defaults in repaying old debts.
The Prime Minister is well aware of the political fall-out the economic downturn, knows that even the next government next year will have no ready solutions in hand, no matter how much they may criticize him. He has, therefore, also promised massive government investments in infrastructure to correct the slowing economy and ensure continued employment. But indications are that there could be job losses of up to 25 per cent in several sectors. Steel prices are going down around the world and India fears dumping of the metal by the aggressive Chinese, who have also cut imports of iron ore from India in a big way as world steel demand continues to dip. The biggest steel tycoon, Mr. Lakshmi Mittal, has seen his wealth continue to be eroded with an 80 per cent drop in the value of his company's share from $105 to $25 and he is now reckoned to be worth only $16 billion against $66 a few months ago. |
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