The collapse of the mighty global financial system has triggered a series
of chain reactions in India, but the impact is not going to be as widespread as
earlier imagined.
The collapse of the mighty global financial system has triggered a series
of chain reactions in India, but the impact is not going to be as widespread as
earlier imagined. The reasons are numerous.
First, the subsidiaries of collapsed investment banks like Lehman are
being bailed out by entities like Nomura of Japan. This includes the
2,500-strong back office operations in Mumbai, apart from the smaller
securities set up. Similarly, American Insurance Group (AIG) in India has a
tie-up with the ever reliable Tatas who have given thumbs up to all consumers
who were worried about their insurance carried out through this vehicle.
Second, and even more significant, is the fact that the conservative
approach to reforms in the financial services sector has ensured that the
tremors of earthquakes in the US are being felt minimally in India.
A meeting a few days ago of the regulators for the pension, insurance and
other similar sectors concluded with a sigh of relief and pronouncement that
slow and steady opening up of the economy has helped in the long run. This is
not to say that capital account convertibility - or making the rupee freely
tradable - will not take place. But probably as the regulators have pointed
out, this can happen when the economy is at a more mature stage.
Ultimately, therefore, the big losers in the global financial crisis in
this country are likely to be the iconic software firms like Infosys, Wipro and
Tata Consultancy Services (TCS). Much of their business comes from the
erstwhile giant investment banks and that could affect their profitability in
the short term. In the medium-to-long term, however, these companies are likely
to have greater resilience given their innovative approach in the past to
hunting out new markets and customers.
The other area where worries still remain is the pullout of funds by
foreign institutional investors from the country's equities and debt markets.
The bourses have been showing considerable volatility ever since the news came
in about the failure of Lehman and the domino-like effect on other investment
banks.
While the Indian stock markets became volatile, they have not crashed as
might have been expected initially. They now seem to be stabilizing as safety
nets are being created for collapsed banks, like converting Goldman Sachs and
JP Morgan into commercial banks while other banks are picking up some entities
cheap like the takeover of Wachovia by Wells Fargo.
As far as the US and even Europe are concerned, the ramifications appear
to be unending as the scenario is unfolding into the biggest banking crisis in
100 years. Financial institutions considered to have a rock-like stability
including Merrill Lynch, Morgan Stanley, JP Morgan and the Lehman Brothers
collapsed within days of each.
Some were rescued through various manoeuvres and only Lehman actually
declared bankruptcy. Reports reaching here also indicate that many smaller
banks are declaring insolvency in the US - a development not being taken note
of by the international media which is focusing on the big fish. Thus average
people in the US are facing severe hardship. No wonder then the battle is being
described as one of Main Street vs Wall Street.
The complex set of circumstances that created the crisis are a
fascinating story of greed and over-reach at the highest level of the financial
system in the US. The solutions being found are even more fascinating - at
least in India. The US administration actually bailed out mortgage giants like
Freddie Mac, Fannie Mae and the world's biggest insurance company, AIG. The
bailout has resulted in the government taking a majority stake in these
institutions including an 80 percent equity share in AIG. In other words, the
US is doing what we in India call nationalisation.
The irony has not been lost on those in the banking industry in this
country. Former prime minister Indira Gandhi was roundly condemned by the US
and other Western powers when she nationalised banks in this country in order
to ensure that credit reached the poor and powerless. Deemed to be a socialist
- or communist-like measure -, it has now been adopted without any qualms by
the avowed world leader of free market economies. It seems the US government
had little choice, as otherwise widespread mayhem may have resulted for the
average citizen both within America and abroad.
In the case of AIG especially, it was recognized that the sudden collapse
of the largest insurer in the world would wreak havoc globally. Besides the
timing of these events could not have been worse for the Bush administration as
the presidential elections are just weeks away. It thus had little option but
to carry out damage control as rapidly as possible.
Clearly the rules of the game change for Western economies during crisis.
Nationalisation can be resorted to when the American people need to be
protected but the same measure can be decried when a developing economy needs
to do so to similarly protect its far more impoverished citizenry.
The nationalization of banks in India opened the way for ordinary people
to use the financial system for small and tiny deposits. It paved the way for
what is known as compulsory priority sector lending. In other words, banks had
to provide a certain amount of credit for agriculture and rural areas. In the
normal course, commercial banks only lend to sectors providing assured and
fairly high returns. But Indian nationalised banks have a social obligation to
fulfill and the directive to do so was made possible only by the drastic
takeovers effected by Indira Gandhi in 1969.
Apart from banks, many other industries had to be nationalized to prevent
millions of workers from becoming jobless. The perennially loss-making National
Textile Corp is one such case when the government had to step in as private
mill owners were closing shop and leaving their workers in the lurch. Though
the corporation and its regional subsidiaries have rarely made profits, the
mills under its charge have also performed a social obligation by producing
cheap cloth meant for weaker sections of society. No doubt the nationalization
process was carried too far, but at the time it seemed the only way out to save
jobs in a country without any social safety nets for the jobless.
So there can be few tears shed in India for the plight of the US economy.
Our focus should only be on how to deal with the fallout of the financial
disaster that has overtaken the global bastion of free markets.
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http://economictimes.indiatimes.com/articleshow/msid-3562654,flstry-1.cms
Life is a bridge. Cross over it, but build no house on it.
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