DARE - Because Entrepreneurs Do

Like it or not, the financial crisis in the United States of America could affect your life in ways you never thought it would. Exports from the world’s largest democracy (India) to the second largest democracy (the US) would slow down: be these garments or information technology enabled services.

Paranjoy Guha Thakurta

Indian stock markets would remain volatile and, in all likelihood, by and large bearish because US-based foreign institutional investors are in terrible shape—many of them are struggling to survive—and have withdrawn much of their money from so-called “emerging economies.”

No tears need be shed for our super-smart MBAs from the IIMs who will be denied jobs with American investment banks carrying fancy salaries and even more fancy perquisites. Employees of Indian associates of some of the best-known names on Wall Street—Bear Sterns, JP Morgan, Merrill Lynch, Lehman Brothers and Morgan Stanley, not to mention the world’s biggest insurance conglomerate, the American International Group—may not find their lives getting difficult. There would be no bloodbath of the sort going on in the Big Apple.

Here’s a small excerpt from a statement issued on September 15 (the real Black Monday) by New York Governor David A. Paterson: “Approximately 11,000 jobs were lost in New York’s finance and insurance sectors between July 2007 and July 2008. More recent data will likely show this number continues to grow and based on past data, approximately 40,000 jobs in the financial services industry in the New York City area can be expected to be lost in the current downturn. All told, approximately 120,000 jobs may ultimately be directly and indirectly affected as a result of financial sector turmoil.”

Yes, we in India are a bit better off. But do we really have reasons to rejoice? Prime Minister Manmohan Singh and Finance Minister P. Chidambaram have repeatedly sought to assuage apprehensions that the financial meltdown in the US would have a significant negative impact on the Indian economy. The PM has, at the same time, stated that the country has to “remain alert” about the impact of the US recession. Since India’s economy in general and our financial sector in particular have become increasingly integrated with the rest of the world, it would be unrealistic to expect the slowdown in the US and the world economy to not have any influence here.

The FM has acknowledged that only a few private sector banks, notably the second largest bank in the country, ICICI Bank, have had exposure to risky derivatives (or financial instruments that derive their values from other instruments) and would, hence, be directly affected by what has happened in the US. None of the major public sector banks, including the State Bank of India, have the kind of exposure to securities of American investment banks that would be considered worrying. Insurance companies in India, including Tata AIG, too have no reason to fear that they could default on their payment obligations.

Chidambaram has cautioned that there could be a tightening in credit supply. This means the chances of interest rates coming down substantially are not very bright even if the rate of inflation stabilizes or even comes down a bit. The Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, has conceded that “there will be an indirect effect (of the financial crisis in the US) because if the rest of the world gets disturbed and capital flows and liquidity shrinks, there is bound to be spillovers, not just on India but all over the world.”

In April, the International Monetary Fund said the US economy is expected to grow at 0.5 per cent in 2008, slower than the rate of growth of the American population. The IMF added that turbulence in international financial markets would continue. Nobody is now wary of using what was once the dreaded ‘R’ word. Recession is reality today.

The impending crisis became evident in 2007. It started in the housing loan market in the US. Non-creditworthy borrowers were encouraged to pick up loans. Sub-prime borrowers began defaulting repayment of loans but banks and financial institutions went on bundling housing mortgages securitizing these in the hope of hedging risks. These complex financial instruments or derivatives were sold to large investment bankers and financial institutions

It was wrongly presumed that the party would never end. But it did. The American economy started slowing down and inflation picked up because of high oil prices. As the loan defaults continued, home values crashed by a fifth in a year. Paper was traded for more paper without underlying assets. The crisis spread from the housing loans market to the whole of the banking and insurance sectors. Then came one government bail-out after another. The total amount that is expected to be spent by the US Administration on “socializing” the losses of giant financial firms will, in real terms, exceed India’s total national income, which is around $ one trillion (Rs 45,00,000 crore) during the current year.

There is no doubt that this is the biggest crisis being faced by international capitalism since World War II. The US has less than five per cent of world’s population. But American citizens consume over a quarter of the planet’s resources. Economists like Nobel laureate Joseph Stiglitz have for long been pointing out that the principal reason for volatility in international capital movements is the huge deficit of the US, which has been borrowing no less $3 billion from rest of the world every day, two-thirds of it from developing countries.

The bubble had to burst. It has. Good luck. Things can get worse.

The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.

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