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The prime minister and finance minister have reiterated that India’s economy will continue to grow at 7-8%. Suchita Vemuri analyses the consequences of this misplaced optimism
India’s stock market valuation fell 56% from January to end-October 2008. Foreign financial investors have reportedly withdrawn USD 5.5 billion from the market during that period. Foreign exchange reserves fell (as on October 17, 2008) more than USD 35,000 million since March 31, 2008. And the rupee depreciated by almost 30% in October. During that time ― as he has subsequently ― Union Finance Minister P Chidambaram frequently asked market players to remain “calm”. Only once, in May 2008, did he exhort banks to “review derivatives portfolio and make sure that customers understand it (the derivative product)”. While this was creditable, it left the monitoring of the disease to the vector ― banks were pushing the market in derivatives, notably ICICI Bank. Not many understood the nature of the instrument ― in the past decade financial institutions creatively designed a host of instruments that were complex and extremely dense…even as the World Bank, International Monetary Fund and other multilateral agencies, including the United Nations, seemingly pushed for “transparency”! In the weeks since Lehman Brothers declared bankruptcy ― a dramatic watershed that marked the (long overdue) official recognition of the fact that the US economy is in recession ― economies worldwide, linked to a global financial structure dominated by the USA, reported varying degrees of impact. Companies are facing cash shortages; recruitment and investment initiatives have been frozen. The Indian finance minister and prime minister have responded by again asking for “calm”, rapidly revising and re-revising growth estimates (on October 24 the finance minister said the GDP growth was likely to be “between 7.5% and 8%”; on October 30 he said it would be 7%; and on November 2, based on Reserve Bank of India (RBI) data, he said it would be 8%; the RBI on October 31 forecast a growth rate of 7.5% for 2009-10 with the prime minister announcing on November 13 that it is likely to be below 7%). The prime minister took time off to castigate ASSOCHAM for making dire predictions of job losses. Meanwhile, Escorts announced that its normal six-day factory operations would be cut down by half even as others in the automobile industry (both auto and auto parts manufacturers) began reporting a significant downturn; Dunlop has “temporarily” stopped production, keeping staff on an “allowance”; many have announced cuts in perks and executive bonuses, among them the Tatas, Goldman Sachs, Google and Jet Airways, and several financial institutions announced staff reductions. A staff reduction attempted by Jet, India’s largest private airline, was overturned only by the intervention of politicians. The prime minister may exhort industry not to lay off staff, wishful in a situation where the market is shrinking. The finance minister may placate business and individual (small) investors, saying in a statement on October 13: “The root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy.” But it was a poor attempt. Not many believe that the downturn is the result of a liquidity problem; the fact is that there is a severe shortage of capital (as distinct from liquid capital), a key component in economic growth. While it is true that the dimensions and likely impact of the current financial-turned-economic crisis ― and certainly the solutions to this ― are still being uncovered and that it will be several months, if not years, for an understanding of the full dimensions and impact of this, creating a false sense of confidence does not help. Indeed, it would delay a solution, and become in itself an obstacle (for the Indian economy) to recovery, much like the failure to ensure birth and marriage registration has adversely impacted social development initiatives. It hardly needs to be stated that without knowledge of the existing reality, solutions cannot be long-lived. Optimism is necessary to initiative. But misplaced optimism serves the opposite function. A survey conducted by the National Council for Applied Economic Research (NCAER) with Max New York Life Insurance in 2006 found that while 96% of households (in 2,000 villages across 250 districts and 2,255 wards in 342 towns) said they could not survive for more than a year on current savings if the main source of income for the family were lost, 54% expressed confidence about their financial well-being. Such misplaced optimism is an Indian characteristic ― the ‘chalta hai’ and ‘we are like this only’ attitudes are fun and even creative at times, but no alternative to constructive planning. The Government of India has long emphasised the need for financial literacy. But little has been done towards this, beyond a few seminars for limited numbers of participants. Not many in power are willing to accept that this crisis was long in coming ― the finance minister’s warning regarding derivatives was a mild exception in the Indian context. Economists like Stephen Roach of Morgan Stanley, Marc Faber, Nouriel Doubini of New York University, Bill Gross of Pacific Investment Management Company ― to name but a few among those at the helm of the global financial system ― have long, indeed for close to a decade, been voicing warnings over the lack of accountability and the direction of the financial markets. Not many were willing to listen as they rode the heady roller-coaster of “growth”. Most warned of the coming recession, a subject that has been centre-stage in discussions in financial circles for much of the last two years. India, being always on the periphery of the global markets, has been impacted less so far by the downturn. But the impact of the shortage of capital is only just beginning to be felt … and only the first few months of the coming year will reveal the dimensions of the shortage. In that context, the budget for fiscal 2009-10 will have a difficult time balancing investment for industrial, agricultural, and social development and investment for social protection. At times of crisis like the present, the lack of financial literacy becomes a source of crisis for individuals. Together with the lack of concrete information, it puts everyone at financial risk. And, as the NCAER-MNYL study said: “A financially secure country cannot be built on the base of a small proportion of financially secure households.” InfoChange News & Features, December 2008
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