[OPE] Impact of US Meltdown on Indian Economy

From: <glevy@pratt.edu>
Date: Tue Nov 04 2008 - 17:43:46 EST

ML International Newsletter
November-December 2008

An update on news and ideas from the revolutionary left in India .

Produced by: Communist Party of India
Liberation international team

World Financial Crisis

Impact of US Meltdown
on Indian Economy: A Quick Assessment

- B

The Spreading Economic Contagion:
A Reluctant Recognition

Indian economy is insulated
the crisis&hellip;The global financial crisis will not affect us
Chidambaram went on in this vein until both he and
his boss Manmohan had to
reluctantly admit that no developing
economy could possibly remain immune to
the global crisis. Still, it
was projected primarily as a financial crisis or
at best a precursor
to a mild recession. But no financial crisis is ever a mere
of the world of high finance alone. Just as the gloom on the trading
floors soon spread to the shopfloors in the factories, financial
turbulence is
just a symptom of the turmoil in the real economy.

In a global crisis of such
proportion where the total bailout packages by all countries work out
to some 3 trillion dollars but where there is still uncertainty whether
system can be salvaged, it is stupid to pretend that India would
be immune to the
systemic crisis. A finance minister&rsquo;s (FM)
job is not to give false hopes.
Panic at the stock markets cannot be
prevented for long with pep words from the
FM. Till October 14, the
Bush administration alone has announced bailout
packages to the tune
of over $ 990 billion apart from injecting fresh
investment worth $
200 billion in banks and private financial institutions to
shore up
their financial position.

The contagion is
truly global
in a globalised world. How can the high priests of
globalisation in India expect to
insulate the country from this
all-pervasive crisis?! Already the financial
crunch is having its
impact on the foreign institutional investors&rsquo; (FII) hot
in India .
Just wait for the impact on trade, foreign direct
investments (FDI), exchange
rates, remittances, balance of payments
(BoP), forex reserves and, above all,
on the macro-economy in India.
Goodbye to the rosy stories of double-digit
miracle&rsquo;, it is now an impending debacle that stares economic
in the face.

The possible
social impact is
mindboggling. The new middle class in India is
witnessing its first
financial meltdown and a possible deep
recession. The information technology &ndash;
business process
outsourcing (IT-BPO) myth would soon be blown. The possible
gains could hardly make up for the IT sector losses inflicted by
recessionary economies in the developed world. Anyway, if the job losses
already running into lakhs (100,000s) in the US , one can well
imagine how much
political pressure will build up there against
outsourcing. If such leading
names like Morgan Stanley, Merrill
Lynch, JP Morgan, Goldman Sachs and Lehman
Brothers start biting
dust and their brightest kids are given unceremonious
orders, Indian B-school products are surely in for a bad patch.
Pre-election political pressure may have forced Jet Airways to take back
decision to terminate 1900 employees, but the job scenario in
the so-called
high-growth high-wage sectors has already turned

All booms in India , based
primarily on foreign money, will soon go bust. The recession-ridden US
consumer/industry can hardly sustain the growth miracles of China and
India .
The surpluses of the Indian bourgeoisie would find a greener
pastures in
greater and greater acquisitions abroad than investing
anew in a dwindling
economy at home. Didn&rsquo;t the Swiss
bankers&rsquo; association point out a few months
back that Indians
were holding $1.4 trillion in Swiss banks? A sum about 40%
than the gross domestic product (GDP)! The only breed that will thrive
is the breed of speculators &mdash; in stock markets, currency trade and
possibly in
the real estate, gold and art pieces where the desperate
wealth would flow.

In US, if it was first
speculative housing market bubble/subprime and then the
financial bubble, in India it has
just begun with the stock market
bubble and possibly the real estate bubble.
When it extends to the
investment bubble (what with the special economic zones
(SEZs) and
other fabulous concessions, the telecom bubble, the IT-BPO bubble
and so on), all claims of India
having weathered the storm would
wither. India perhaps might go under late
and might take longer than
the rest of the world to come out. All over the
world there are 77
tax havens like St. Kitts and Cayman Islands . But in India
are 580 SEZs!

The Immediate Impact on
Indian Stock Markets

The festival season in India
seldom so gloomy for the share market. Investor wealth worth Rs. 250, 000

crore (1 crore = 10 million) was wiped out on the bourses on a
single day, on
10 October. The Sensex fell by 1000 points before
recovering some 200 points,
an intra-day drop of some 800 points.
The lachrymal wave washed away the
festive mood.

At the first sign of stock
market crash and FII funds
stampede, the United Progressive Alliance (UPA)
Government has once
again permitted P-notes (participatory notes) paving the
way for
enhanced speculation. The present convulsion in the Indian bourses
would look mild before any possible explosion in future as a result of
heightened speculation. Despite the government itself
acknowledging that the
P-notes were being abused/misused at the time
of banning them, no safeguard has
been put in place. Anyway, how can
there be any safeguard within the realm of
speculations? It is

Impact on Indian Banks

&ldquo;Indian banks are safe,&rdquo;
reassured Reserve Bank of
India (RBI) Governor Subbarao repeatedly. Indian
banks' exposure to
international markets is relatively small at 6 percent of
total assets, the rating agency Crisil said, adding that even lenders
with large international operations have less than 11 percent of their
overseas. But a mini-version Indian bailout was in the making
simultaneously in
the first week of October with the government
virtually shoring up two mutual
funds and Life Insurance Corporation
(LIC) coming to the urgent rescue of three
more which landed into
liquidity crisis in the backdrop of a steep crash in the

At a time when the big names
in Western banking industry are queuing up for bailouts, there may be a
leap in non-resident Indian (NRI) deposits in Indian banks as
these funds would
look for a safe haven back home. We can hence
expect a big clamour from the NRI
lobby for greater concessions for
their deposits. Chidambaram would only be too
willing to oblige. The
RBI recently increased the credit cost on term
borrowings (with more
than 7-year maturity) to Libor+4.5% and even then the big
corporate names are finding it difficult to raise funds amidst the
present turmoil. Indian borrowers will end up paying more for the
lenders and Indian banks might be forced to pay more for the
NRIs &ndash; all in the
backdrop of a creeping recession and falling
rate of profits.

Even when Chidambaram was

preparing to pass some 66 reforms-related pending Bills in possibly
the last
session of the parliament and a committee had prepared a
blueprint for major
financial sector reforms, the US
crisis fell like a bombshell. No doubt, the UPA ideologues would also
use the global meltdown as a pretext to push the same risky reforms. In
years to come, as the new investment projects go under one after
the other and
investors and insurance companies and hedge funds go
under trading in credit
default swaps and all such devices, the
financial crisis here in India might be
the denouement rather than
the beginning as in US. ICICI, the symbol of new
breed of
unscrupulous financial manipulators, is already in doldrums.

Increasing Liquidity

Liquidity position
in India
is comfortable, said RBI Governor Subbarao after a slew of
measures. But he
avoided hinting at any possible reduction in prime
lending rates. The liquidity
position may be comfortable, the banks
and financial institutions might be
slush with funds once again but
with interest rates ruling high there is no
pick up in the credit
offtake by SMEs (small and medium enterprises). As they
are the main
employment providers in the industrial sector, the employment in
this sector has already taken a heavy toll. A deep and prolonged
recession in
the West might result in unemployment for millions of
these workers.

The RBI hurried to cut Cash

Reserve Ratio (CRR) by 150 basis points to 7.5 per cent, releasing
more than
$12 billion fresh liquidity into the Indian banking
system. But if mere money
supply alone can drive the economy and
industrial growth forward
uninterruptedly, then no economy will ever
face any recession and there cannot
be a meltdown of this nature.
However, amidst all-round alarmism and panic
reactions, confidence
building itself has become the main plank of economic

The government has once again
ECB (external commercial borrowings by corporates). It is a different
matter that in the light of the meltdown nobody would bother to take a
look at dollar bonds issued by Indian banks despite all their
backing by the
Indian government and hence they are abandoning the
idea raising external
funds/borrowings. While RBI might come forward
to infuse liquidity liberally in
the short-term, wait for the
booming NPA figures in the medium and long term.

Exchange Rate: Rupee Depreciation

When the western
economies are
going into a tailspin one after the other, the
appreciation of dollar and euro
looks somewhat paradoxical.
>From unprecedented appreciation earlier a few
months back, the
rupee fell to record low &mdash; reaching Rs.49 per dollar at some
point. The dollar is gaining vis--vis rupee because of the
outflow of the FII funds
and since the worst is yet to come in the
US /global
meltdown, a repeat of the East Asian crisis in India is
very much a possibility.
During the preceding period, if the rupee
appreciated by around 18%, now it has
depreciated by around 19%
during this Jan-Sept.

The exporters who
were crying
earlier are happy but it is now the turn of importers to
come to grief. Not
many people know or remember that manufacturing
imports had overtaken total
domestic manufacturing production in the
domestic organised industrial sector
this year. Apart from cost
escalation and consequent reduction in profit
margins, just wait for
the impact of the rupee depreciation on inflation. The
prediction of possible fall in inflation rate to single digit by
January sounds hollow in the backdrop of this as well as the cut in CRR
and other measures by the RBI aimed at increasing the

Impact on Trade

trade deficit is reaching
alarming proportions. If exports are
growing, imports are growing even more.
Thanks to workers&rsquo;
remittances, NRI deposits, FII investments and so on, the
account deficit at around $10 billion doesn&rsquo;t look so threatening.
for some reasons if the remittances dry up and FIIs funds take
flight, it will
be a repetition of 1991 after a few years if forex
reserves get depleted and
trade deficits keep increasing at the
present rate. Even as the country&rsquo;s
exports and imports
registered a substantial growth of 35.1 per cent and 37.7
per cent
in dollar terms, respectively, during the first five months of the
current fiscal (April to August), the trade deficit during the period
has shot
up. The trade deficit was around $14 billion for a single
month of August 2008,
a record level. Even Goldman Sachs&rsquo;
prediction that India &rsquo;s forex reserves would
decline to $271
billion by year end from $310 billion in March 2008 looks a
conservative estimate.

Unprecedentedly high forex
reserves were becoming a burden. As
most of these funds were in dollars, the
government had parked most
of them in US treasury bonds or invested them in
securities and
bonds in foreign banks. With the meltdown and consequent poor
returns following rate reduction, these treasury investments have taken
beating. The government had its fingers burnt with the earlier
depreciation. A part of these funds could have been used to
clear some of the
external borrowings. Now with the recovery of the
dollar, repayment costs in
rupee terms have also shot up. A golden
opportunity was missed. The government
was toying with the idea of
establishing a wealth fund/SPV (Special Purpose
Vehicle) with these
reserves to finance private parties taking up
projects through PPP. But, despite all the hype, the PPP has
been a
total flop so far.

An Indian Recession?

It might be just a slowdown in India
till now. But a
recession cannot be ruled out in the medium term. Chidambaram
claiming 7.5 - 8% growth this year. ADB has predicted 7% growth. Many
agencies estimate industrial growth between 6.5% and 5.2%
from around 11-12% in
2006-07. It is hoped that agriculture would be
the saving grace this year
thanks to a good monsoon. But just recall
that Chidambaram was boasting about a
possible 10% growth early this
year after the budget and the situation has

True, there is a boom in FDI
this year. The
total FDI between April and August this fiscal stood at $14.6
billion. A record figure. Average monthly FDI inflow is above $2 billion

whereas a few years back that was the annual figure. Kamal Nath was
asserting that the target of $35 billion for this year
would be achieved. But a
closer look reveals that a sizable chunk of
this FDI going into mining loot,
services, financial services in
particular, entertainment industry including
luxury hotels and so on
and also on mergers and acquisitions (M&As) not
mainly to fresh
investments in the core productive sectors alone. The long-term
sustainability of such a pattern of FDI flow is anybody&rsquo;s guess.
Especially, in
the midst of the global liquidity crunch. Inflows
into already committed
projects might give a false impression and it
remains to be seen how long this
boom will continue. To sustain it,
Chidambaram is bound to come up with a slew
of fresh liberalisation
measures. FDI caps in insurance, banking and financial
services are
already being hiked. There might be 100% FDI in single-brand
There will be more and more sellouts to attract foreign capital.
keeps repeating ad nauseam that India ,
like China
, will continue high growth despite recession in the developed countries.

Well, if high growth is to be
primarily by foreign capital assisted by government landgrab, tax
waivers, assured returns guarantees for infrastructure investments and
BOT terms and so on, in short, by making the whole of India
into a
tax haven, the structural distortions this Manmohan gamble
would lead to is
mindboggling. Leaving a handful of big business
houses and Indian MNCs, nothing
Indian would be left in the
&ldquo;Indian&rdquo; economy. And even the &ldquo; India &rdquo; MNCs
have started looking outward. India Inc spent $26 billion in mergers and

acquisitions abroad this year. The global meltdown would, if
anything, only
accelerate this trend and the scarce capital
resources would be channelized for
overseas spending. If this is the
story of overseas M&As by &ldquo;Indian&rdquo;
M&As in India
by foreign companies is even more breathtaking. In
power sector alone, the
merger and acquisitions worked out to $5
billion out of a total M&A value
of $55 billion in the
infrastructure sector alone. This is the secret behind
the high FDI.
But overseas M&A is not a rosy path. Tatas teamed up with AIG
which was one of the first to go under. TCS, Infosys and
WIPRO&hellip;all were on an
acquisition spree abroad but at home
they are the leading ones in issuing pink

The nation would soon realize
the real cost of the
N-deal. N-deal was also a sort of bailout for the US industry.
Kakodkar has once again made it clear that 20 nuclear reactors would be
set up!
How in the given situation the governments would foot the
bill in the next ten

Deflating Growth Bubble

And what about the growth
Well, the ratio of savings and investment to the GDP reportedly remains

high at 35 per cent. So far so good. Still, there is a slowdown in
the Indian
economy. The core sector growth is down to less than 4
per cent. All vital
productive sectors are on a slowdown. With such
a structural background, if and
when the Indian economy slips into a
recession, the recession will be
protracted and there will be no a
quick revival. Crude oil prices have declined
to $80 a barrel. The
monsoon has been good in most parts of the country. For a
couple of
years it is not difficult to continue with the growth story. But
infusion of liquidity, i.e., increasing the velocity of circulation
alone in
other words, can hardly sustain production. The basic
structural flaws are
bound to come back to the fore and haunt.

The problem might be made to
look minor
&mdash; as that of liquidity &mdash; at present but if there is a severe
in demand then no amount of infusion of money into the
system and supply side
magic would be able to save it. And given the
fiscal scenario, the government
would not be able to go for any
fresh neo-Keynesian binge either, leave alone
any major corporate
bailout as in the US . Pay commissions and loan
waivers might
sustain aggregate demand for a couple of years but signs of
are already on the wall. Despite repeated promptings of Chidambaram,
the bankers are not ready to reduce even the home loan rates and not
just the
prime lending rate for the businesses. After all, they are
businessmen and they will continue to be top executives in
their banks while
Chidambaram and his party might go out of power.

The 11th Plan estimates that
maintain an average annual growth rate of 9%, the investment in
infrastructure would have to rise from Rs. 259, 839 crore in 2007-08 to
Rs. 574,096
crore in 2011-12 at constant 2006-07 prices, aggregating
to Rs. 2,011,521 crore
over five years. In the terminal year, this
works out to be 9 per cent of the
GDP, up from 5 per cent of the GDP
in 2006-07. The Plan document itself says
that the government cannot
manage this much money and a substantial part of it
has to come from
the private sector. PPP is supposed to pave the way. But what
is the
record so far? The Government of India's Committee on Infrastructure
which monitors PPPs notes that 244 PPP projects are ongoing and another
76 are
in the pipeline in the country. The total capital outlay in
the ongoing projects
amount to a minor fraction of the total
projection by the Planning Commission.
To finance infrastructure
projects, the GoI established an India Infrastructure
Company Limited (IIFCL), a wholly Government-owned company to provide
long term finance for infrastructure projects. According to the IIFCL
it would provide loans upto 20 per cent of the project cost
and projects
"awarded to a private sector company ... [a
company established] through
Public Private Partnership (PPP) shall
have overriding priority". And how
big is this IIFCL? The GoI
has successfully persuaded the World Bank to give it
a loan of a
meagre Rs.2700 crore to finance projects worth Rs. 2,011,521 crore!
Making bogus projections to justify pro-private sector policy changes is
thriving industry in India .
In such a situation, can any
sizable fund flow into the risky infrastructure
sector of a
developing country amidst tottering private banks and investment

Many approved SEZs are in
doldrums as they are not getting any units and this whole thing is a
real estate speculation of gigantic proportions. Even though
the real estate
speculation in India is
taking a different
trajectory and is not as reckless as credit instruments
without any
backing by collaterals as in the US subprime, the real estate bubble
centering around SEZs landgrab is no less serious. Despite RBI&rsquo;s
the banks were competing to lend to SEZ promoters and
even the nationalized
public sector banks accumulating huge NPAs
would be lined up for private
takeover. SEZs might finally achieve
what Narasimham&rsquo;s two reports could not
achieve. If millions
of home loan borrowers are defaulters, the banks can take
back their
houses. Even they can takeover the SEZs. But if they themselves go deep

into the red irretrievably, they themselves would be taken over.
incurring loss too would be taken over by stronger sharks.
After a wave of
takeovers, if the economy doesn&rsquo;t revive, this
would only amount to taking over
the losses. A massive collapse in
asset prices is the ultimate eventuality.

Social Impact

&lsquo;Suicides after market crash
is an
urban trend&rsquo; &hellip;screamed the headlines in a pink paper. Beneath
that was
the sob story of an entire family committing suicide after
heavy loss in the
stock market. &ldquo;Whether it is a seemingly
well-to-do US-resident of Indian
origin wiping out his entire family
or middle-aged brother-sister duo killing
their parents and then
committing suicide, the financial crisis has hit
everyone, and has
hit them hard&rdquo;, the report added. At least, the desperate
farmers go alone leaving their family members in the lurch. But the
middle class investors take their entire families along and
that is the level
of urban investing middle class insecurity. This
explains the golden age for
gold as investment in yellow metal is
considered safer. Just think of the
hundreds of new scrips by
companies with ambitious investment plans counting on
investible surpluses of the middle classes and also the market
opportunities opened up by their wealth. All these plans for new scrips
will be
scrapped. The middle class boom might be glamorous but the
depression in
incomes and losses in the markets are far more
agonizing. Pink slips are
painful indeed and joblosses are not
limited to the West alone. Those who are
hoping that jobs in the
West would shift across to the cheaper shores of the India are missing the
point that domestic job
losses due to recession in the West as well
as a slowdown in India would far
outweigh such outsourcing gains.
Even the real estate boom is going bust in Bangalore , the Indian El

The Indian BPO sector
40 per cent of its revenues from the financial sector of the
countries and exactly as they mushroomed fast they will
wilt with the same
speed. IT-BPO sector in India
accounts for
5.5% of the GDP but 30% of exports and a very high share of
sector employment in cities like Bangalore .
El Dorado is poised to
turn into a hell!

Take the case of
garments and
textiles. Hardly a few months back, tens of thousands
of workers, mostly women,
were out of jobs in Chennai and Bangalore

and towns like Tiruppur and Karur. The villain was the rupee
leading to some 18% reduction in incomes in rupee
terms. After the loot by
layers and layers of intermediaries, the
factory producer was left with nothing
and hence closed down the
unit. Now dollar has appreciated, smile returned to
the faces of
garment owners but the smile soon vanished. The current exchange
rate offers handsome returns but the orders are drying up due to
recession. No margin then&hellip;no orders now! No jobs in
both the scenarios.

The impact on the
class by means of wage compression and workloads, illegal
retrenchment and
worsening of job security and working conditions
etc., would be onerous.
Already this has started happening. For
reasons of space, we are not
elaborating. But we can only say there
will be many more NOIDAs.

The employment in
industrial sector &ndash; both public and private &ndash;
was 8.98 million in 1997 but it
was down to 7.62 million by 2005,
i.e., precisely during the growth miracle if
we leave out the
disastrous year of 2001-02 for the industry when the growth
was very
low. If the growth miracle turns into a debacle what will happen to
organised sector employment? Formal sector will be informalised and
workers will be booted out.

Bailouts for the bankrupt and
boot-out for the workers. The same
logic of capital! Total blackout of the
possible social impact of
the meltdown and almost virtual absence of any
discourse on safety
measures/nets is one of the characteristic features of the
crisis of capital, across the globe as well as in India .

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Received on Tue Nov 4 17:52:23 2008

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