ECONOMY: GLOBAL CRISIS Someone Tripped And markets across the globe fell. How India must cope. LOLA NAYAR

ECONOMY: GLOBAL CRISIS

Someone Tripped

And markets across the globe fell. How India must cope.

LOLA NAYAR

http://outlookindia.com/article.aspx?278008

The Good News...

• Unlike 2008, liquidity is not a cause for worry in India
• Inflation to ease if global prices of commodities, crude oil dip
• This should boost domestic demand, stall interest rate hikes
• May hasten reforms process as UPA strives to prop up growth
• Post-2008, India banking more on emerging markets for growth

...And The Not-So-Good

• Uncertainty on how US, EU are going to handle present crisis
• Sluggish growth in Western markets will hit exports
• Bid to fight joblessness may lead to restrictions on IT outsourcing
• Banks, institutions in EU less likely to fund projects overseas
• Uncertain scenario may make investors risk-averse; gold may gain.

***

Three years ago it felt like financial doomsday. By now we know that it isn't quite so dire. As the US and Europe economies grapple with debt demons and downgrades, there's a more measured response in India. The markets are restless, but not suicidal; no banks or companies are out of cash. But with the hindsight of experience, most experts agree that the Indian economy, struggling to check inflation while sustaining eight per cent growth, will be impacted. Here's how:

We already knew the United States and Europe were in trouble. Does this recent crisis change things?

Though there's no immediate financial crisis in the West, economists contend the problem is a lack of socio-political confidence. "I see it as Stage 2 of the global financial crisis as it is not a new problem but an extension of the first crisis," says Dr Arvind Virmani, India's representative to the International Monetary Fund. It also reflects drift. In the US, the mortgage issue—which led to the 2008 financial meltdown—has largely been ignored. And Europe has been struggling for a while with its flawed process of economic integration, particularly in countries like Greece, Portugal, Ireland and Spain.

There's one major difference between the scenario now and three years back. Rakesh Mohan, former Reserve Bank of India (RBI) deputy governor, points out that in the US, "while the fiscal deficit and sovereign debt is high, it is the breakdown in the political decision-making that is the problem". There's no option, really: as in the past, the US government will step in to try solve matters. Generally, there is hope of the US being able to solve its problem in the medium term. With an aging population and social rigidity, Europe is a tougher call. As such, emerging markets cannot depend on demand growth from European markets, or look to EU banks and institutions for funding.

---

"I see the current crisis as an extension of the first. It's Stage 2 of the global financial crisis, not a new one." Dr Arvind Virmani, India's representative at IMF		"This is not a financial or economic crisis, but a real-sector crisis. The debt issue is a long-term problem." N.R.Bhanumurthy, Economist, NIPFP
"India's growth will have to depend on domestic demand. For this, governmental malaise has to go." Devesh Kapur,  Director, CASI		"The fiscal deficit and sovereign debt in the US is high, but the real problem is of political decision-making." Dr Rakesh Mohan, Former RBI dy governor

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So how is India likely to be affected by the current economic crisis?

Pinning hopes on an 8.2 per cent GDP growth this fiscal, policymakers have been at pains to emphasise that India's growth is led more by domestic demand, which is why India could log 6.8 per cent growth even in 2008-09, in the midst of the worst phase of the global financial crisis. "Downside risks to growth may have increased after global developments, but they are likely to have limited impact," says an optimistic RBI. Actually, the central bank's job has gotten tougher. So far, it has routinely increased interest rates to check inflation. With growth further threatened, it may have to focus more on addressing those concerns.

India's growth, driven by domestic demand, has endured many recent storms. But now, govt action is called for.

While the partly closed nature of our economy may provide some protection, some of the drivers of our economy—like the services sector—are likely to be affected. "There could be a direct impact on services trade, like after 2008. Further clampdowns on outsourcing (in the US) will be a major setback," says Biswajit Dhar of ris, a think tank. Experts like Sanjeev Sanyal of Deutsche Bank say Asia—which currently dominates the emerging markets with 60 per share of consumer demand—provides some answers. This could well offset the dip in US demand.

Clearly, India must strive for closer integration with other developing countries. The process is on, but it may not totally immunise us from the impact. Devesh Kapur, director, Centre for Advanced Studies of India, feels India is unlikely to achieve export targets in 2010-11. "India's growth will have to rely considerably more on domestic demand. For this to happen, India will have to seriously address the incredible levels of governance-related malaise that has set in under UPA-II," Kapur stresses.

How will this impact UPA-II's battle against persistently high inflation?

Policymakers are banking on a sizeable drop in crude and other commodity prices to help ease imported inflationary pressures. The promise of a likely downward revision in the price of petroleum products if global crude prices fall further is the only consolation that the Indian government has so far been able to hold out to consumers and industry. Giving a clue to the central bank's thinking, RBI deputy governor Subir Gokarn said a fall in commodity prices is likely to impact the pace of rate hikes, which have happened 11 times over the past 15 months.

Although food prices seem to have stabilised to some extent, the prices of manufactured products are still on the upswing. As India looks forward to easing imported inflationary pressures, commodity experts are not too sure the drop in prices will be sharp or last for too long. Also, while imports may be cheaper now with the rupee appreciating against dollar, there is no knowing when the reverse trend will set in. Vikram Murarka, chief currency strategist at Kshitij Consultancy Services, foresees the dollar strengthening against rupee (to levels over `46-47) and possibly other currencies in 6-12 months. Together with slower economic growth and an anaemic stockmarket, it may not exactly be good news.

Three years ago, the Indian stockmarket crashed. Will it continue to mirror global trends?

Advice for the investor: ignore the overreaction in the markets, stay invested, keep buying equity for the long term.

Markets are driven by perception, that most fickle of barometers. Of course, domestic investor sentiments have taken a knock (as always, some argue that this was necessary) in tune with global trends. But it doesn't look like a freefall situation. In the near term, market experts feel risk aversion will remain high, impacting investment flows to emerging markets, including India. The government recently upped the limit to which individual foreign investors can invest directly in the market through mutual funds. Expect more such feelgood measures.

Retail investors should be aware that data has shown that Indian markets aren't really well-developed playgrounds; for one, institutional players dominate them. In such a scenario, it's best to stay calm and invested, and make fresh purchases for longer-term periods. A big-picture view on the sustainability of the "India story" is necessary in times like these, argue financial planners. That's actually the only reasonable tack, given the typical market view. "We are still in a hypersensitive mode as the outcome is not known, nor how the crisis will be handled," says Vikas Khemani of Edelweiss Financial Services.

Doesn't all this make a scam-tainted government's job tougher?

The mood is indeed sombre in industry. To reverse the lagging growth sentiments, there are expectations that the government would step up on reforms. Describing the recent global economic events as a "warning to the political systems to put their houses in order", Virmani stresses, "unless we do so, the growth will be fitful...." There are also concerns on ballooning fiscal deficits, which experts feel can be addressed only by keeping to the 13th Finance Commission's recommendations.

"Future government initiatives to significantly reduce subsidies for fertilisers, foods, and fuels would be a positive factor," states Takahira Ogawa, Standard & Poor's sovereign analyst based in Singapore. Rakesh Mohan sees the government push for a new land acquisition bill as a major positive signal for reforms. Some clearly feel the 2011 crisis could jolt the UPA out of reforms complacency. As they say, that would be a positive outcome.

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AUTHORS:  LOLA NAYAR 
TAGS:  GLOBAL FINANCIAL CRISIS | SENSEX | NIFTY | BSE | NSE | CREDIT RATING | STOCK MARKETS| ECONOMY | DEBT & DEFICIT 
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DAILY MAIL

HAVE YOUR SAY

AUG 13, 2011 02:47 PM 1	Foreign money, FDI, FII, ECB, has played an important role in turbocharging the Indian economy. It flows in when times are good, flows out when they are not. We should factor this into our sometimes overly sanguine assessments of the future. ASHOK LAL MUMBAI, INDIA  PERMALINK  |   LIKE (0)  |   DISLIKE (0)  |   REPORT ABUSE
AUG 13, 2011 08:45 PM 2	Reforms means cutting private deals with businessman. In India the richests have the government support. Congress to ab apni dukan hai said mukesh. Mukesh murli and rahul are together and brough reforms and investment. These people and their paid employees, the business channel started crying growth, reforms, investment again. If you do custodial interrogation of these media wallah then they will croak how much each has received for talking about growth and reforms. The fact is there are two drivers of the economy. first is oil prices. Now there is shortage of oil or rather there is no surplus production capacity for oil and hence no body can stop spikes in oil prices. More GDP growth will increase the oil prices and hence inflation and hence higher interest rates and again recession.  So stupid journalists who pose as economics genius, particularly with strange surname will push for growth and middle class idiots will lap it up. There cannot be growth but degrowth with end of oil. So what is the solution : 1. Increase the oil prices globally by taxing it. This will push the energy saving technologies ahead. 2. Put engine restriction on personal vehicles. 1500 cc is maximum should be allowed. 3. Tax bigger vehicles.Tax heavier veihicles. 4. Invest huge amounts in Railway tracks. Straightway double trunk routes like Delhi Mumbai, Delhi Bangalore, Delhi Kolkata, Mumbai Bangalore. 5. Invest in mumbai type locals which are spread linearly on single north south line ad not delhi which is spread in all directions. 6. Remove subsidies from solar equipment and instead raise energy prices. A free competitve market will bring down the prices more than subsidy can bring down the prices. As we have seen in telecom tarrif has come down because of competition. RAMAKRISHNAN2 NY, UNITED STATES  PERMALINK  |   LIKE (6)  |   DISLIKE (0)  |   REPORT ABUSE
AUG 13, 2011 09:01 PM 3	The second is real estate bubble created by government. Government has allowed cheaper loans on land and thus created a run on the land. Government must cut to zero as lending on land part of housing and provide 80 percent or 85 percent on construction costs. The increase in land prices have pushed the inflation in cities because rental values are now biggest component of any service delivered. Secondly any unused plot should be taxed heavily. thirdly the registry charges should be brought down to allow quick exit. Governments must tax bigger companies a competition tax of 25 percent as compared to new entrant. The in between companies should pay in between taxes. This will allow distributed manufacturing and new start ups to flourish. This will also push jobs in to interior towns. similarly manufacturing in metros like mumbai and delhi should be taxed 10 percent to decongest them. Since bigger groups are the one who pay slush money or who pay the politicians trust by cheques they are supported by politicians. One minister related to energy demands money in billions of rupees, nothing less. So we must tax bigger groups more to prune them. Many years back government allowed small companies to grow by giving them protection and a company like videocon came out. A pro small policy wil allow many really competitive small companies to grow and replace sloths of Indian corporates who solely survive because they can modify tender conditions, who can borrow at lower rates and who hire talent because they can pay. RAMAKRISHNAN2 NY, UNITED STATES  PERMALINK  |   LIKE (5)  |   DISLIKE (0)  |   REPORT ABUSE
AUG 13, 2011 09:06 PM 4	Worlds biggest fraud is trickle down economics or Reaganomics proposed first by milton friedman. In USA there is huge opposition to this model as it has made big corporates richer at the expense of general public. Trickle down economics actually helps bigger companies like microsoft or samsung or TATAs and suppress real competition. We must tax bigger groups or else these corporations will gobble up small companies the way Areva, Siemens, Microsoft, Thermax, L&T, reliance has done in India. RAMAKRISHNAN2 NY, UNITED STATES  PERMALINK  |   LIKE (4)  |   DISLIKE (0)  |   REPORT ABUSE

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