The Global financial crisis—India is not immune | Nilotpal Basu

Published on 10-11-2008 In General

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The Global financial crisis—India is not immune

Fear and anxiety is running across most parts of the world. Obviously, the financial crisis starting in US has spilled over across the globe. The most visible signs of the crisis are manifest in the disappearance of a large number of huge behemoths in the financial sector – banks, insurance companies, mortgage companies, pension funds, hedge funds and so on. Even if some have barely survived, they desire to refashion themselves beyond recognition. The close integration of the global financial system has made the crisis so pervasive. The system based on a disproportionate emphasis on short term speculative investments and driven by an asset-price based mechanism, with the speculative bubble bursting, the impact can be easily gauged.

Despite early signals, the dotcom bubble going bust earlier, proper lessons had not been drawn. So this latest fiasco with the housing bubbles also exploding. A credit driven consumption pattern which overstretches beyond a sustainable limit fuelled by cravings for super profits was bound to fail. But the magnitude makes the crash threaten the entire global financial system. The scale of the meltdown cannot be explained away by a few chief executives of major financial corporate. It is much more profound and systemic in nature. That a paradigm shift has become necessary is also evident. The working group formed by the United Nations to examine the nature of the financial crisis and the nature of the correctives have conspicuously excluded neo-liberals and almost exclusively included Keynesians and Marxists. Growing demand for government intervention and stronger regulatory frameworks is reverberating all across. From Europe there is a new assertion towards evolving what they are calling a 'new capitalism'. Obviously, the viability of the three and half decade old paradigm of neo-liberal globalisation cannot survive. Along with that, status of US as the harbinger and spearhead of the global financial order is in disarray.

What then happens to India? Is it really completely safe apart from 'ripple effects' as our finance minister never tires in pointing out? Definitely not – primarily because the scale of the shadow economy which has engulfed the global financial system was too large to leave the real economy unscathed. According to the Bank of International Settlements the outstanding amount of derivatives which became the principal instrument for speculative activities indulged by the now extinct and mauled financial behemoths rose to a staggering US $ 596 trillion in December 2007. This was eleven times larger than the aggregate global GDP of US $ 54 trillion around the same time. It is a classic scenario of the shadow engulfing the owner. So the financial crisis no longer remains confined to this sector; but has triggered off a full-fledged recession. And only an ostrich like attitude can claim that India will remain unaffected.

But it is also true, as compared to some other developed market economies which were driven by the urges of neo-liberal policies and had completely deregulated and had withdrawn the government most completely from much of the financial sector entities, India is in far less trouble.

But ironically some of the apologists of the neo-liberal paradigm attribute this to the 'sagacity' of the Indian political leadership, particularly the present Prime Minister. Nothing could be further from the truth.

Day in and day out during the forty-nine months that the Left supported the UPA government the country was dished out a menu –'good economics' is being sabotaged by 'ideologically driven agenda of the Left'. Particularly enraged by the opposition to several financial sector 'reforms' – increasing FDI cap in insurance from 26 per cent to 49 per cent, increasing foreign equity in private Indian banks and enhancing the cap on voting rights beyond 10 per cent regardless of the actual ownership, investment of pension funds and provident funds and to cap it all full convertibility of rupee on capital account – choicest invectives were hurled.

But what an irony? The very Prime Minister who had declared on March 18, 2006 before a global audience in Mumbai of the Reserve Bank of India – "India would prepare a roadmap on full capital account convertibility to fully integrate the Indian financial system with the global" is now forced to say "the foremost challenge is to insulate India from the ill effects of the international financial crisis".

The writing on the wall is loud and clear. The world is in recession triggered by the financial crisis. India cannot remain immune. The most visible casualty is employment. The spectacle of young boys and girls belonging to Jet Airways will leave a lasting imprint. The IT and the ITES sector is looking grim, so are the financial and other services sector jobs. Leading corporates are already reporting there will be far less recruitment from leading technology and management institutions. Across seven sectors there will be up to 30 per cent retrenchment that is what an apex trade body declared. Steel, cement and other infrastructure and housing related industries are engulfed by the still unraveling process of recession. Housing and real estate already looks very vulnerable. But what is worrisome that much of our export oriented industries particularly in the SME sector happen to be labour intensive. With a recession, exports are bound to be affected and so are jobs in this sector.

In this dark times, the only way out seems to be strengthening the domestic sector. And that can be done by stricter controls on capital inflow, restricting the flow of money into speculative channels by giving up the idea of investing pension and provident fund in the stock market and other dubious derivative markets. At the same time the government's spending must lead the road to recovery by enhancing public investment in agriculture, social sector, SMEs and infrastructure. And finally, it is equally important to try and bring down the price line. Oil prices have come down internationally, it must be replicated by strengthening the public distribution system, and essential commodities must be made accessible to our vast majority. In facing the bleak landscape, let people count.

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