Sunday, December 7, 2008

Does India View Economy Using American Lens?

Being a non-economist trying to understand the complexity of economics, I guess I have certain advantages. Like asking stupid questions and getting away with it.

In any case, I am unable to understand how India is really affected by the economic crisis. We all know that none of the Indian Banks (except as rumoured ICICI) are hit by the sub-prime crisis directly. The MNC banks do not dominate the Indian market yet. And it is not as if the industrial growth in India is heavily dependent on exports (we still have a negative balance of payment). So how come there is a sudden drop in risk appetite in the financial sector?

Why is there a credit crunch in India? How do I know? For the last two months there has been no pestering calls from bank representatives offering loans! Have you noticed? Some days ago there was news that Ratan Tata has recommended setting up of a separate fund so that the flow of fund to established companies don't dry up. So even they are not getting funds.

Some say the fall in the Sensex value is an indication of how closely we are linked to the world economy. May be. The fall in Sensex is not because Indian companies suddenly started doing badly; rather because of withdrawl of funds by Foreign Investors to book profits and pump cash back to the parent. Sensex is not the Indian economy. Or is it? It is an indicator of investors assessment of the state of econmomy under normal circumstances. Not when there is a flight of capital due to external factors.

The Indian economy is not longer as isolated as it once was. But it not closely coupled as yet. Export is only about a quarter of India's GDP. This is bound to drop as the world enters recession. As per the news item in Financial Times: "India’s exports, which have been hammered by a sharp fall in demand and liquidity, have declined 12.1 per cent in October from a year earlier to $12.8bn, the first drop in absolute terms in seven years, according to the RBI."

On the other hand, this could be an opportunity for India too. To survive the west may shed (outsource) even more aggressively what they see as non-core elements of their business.

Besides, the steel prices are falling ... oil prices are falling ... inflation is down and does not look like deflationary right now. So shouldn't this actually boost domestic consumption? For the size of India the growth should be ideally sustained by internal consumption alone. Exports should only be considered binus. At least that is what common sense dictates.

Or do our Harward and Stanford educated bankers and industrialists view Indian economy through an American lens? No? Then why is the recent announcement by RBI termed emergency measures (are we in trouble?) and why does India Inc feel that the measures are not sufficient?

There I am done. I have asked lots of dumb questions that should infuriate the economists. Now if only they read this post and think it important enough to react.

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1 comment:

Mberenis said...

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