Thursday, February 19, 2009

Indian Economy - confusing scenario

Every one knows that the U.S.economy is accelerating down the hill. That the European economy and the Japanese economy are already in recession is pretty clear. But, it is somewhat unclear whether the Indian economy will come out unscathed or it will go the western way.

*Unlike Europe and Japan, India does not depend much on exports. The contribution of exports to the GDP is less than 15%. So, howmuchever sectors like IT and Textiles are hit on the export front, they can at best slow down the Indian economy; they can not reverse the growth into a negative figure.

*The mess in the western economies owes itself to the gross mismanagement of awe-inspiring financial institutions. Simply put, the highly-paid bankers did not do the work they were hired for and were busy rewarding themselves with fat bonus cheques which they did not deserve one bit. While they were having a party at the expense of the genuine depositors and honest customers, another group too partied along. That group was the borrowers without the slightest eligibility to borrow in the first place. By the time the parties got over and the not-so-gentlemen woke up with a hang-over, the down slide of the financial institutions popularly called ' sub-prime crisis' had already begun in an irrevocable way. The group of ineligible borrowers easily washed their hands off the mortgaged properties and went back to partying. They had nothing to lose except the mortgaged properties; it was not their loss since this group had never repaid the capital borrowed or the interests accumulated. They dumped the properties on the banks and walked free, perhaps with a song on their lips. But the group of overpaid fatty bankers could not go back to partying since the dumped properties snowballed into a big slump in the real estate market. They were left to hold properties which fetched only a fraction of their original value. One thing led to another and since there is a series of banks and other financial institutions involved in holding bits and pieces of these securities irrespective of who lent money to the worthless borrowers to start with, the entire system started collapsing. The fall of the financial system started affecting the real economy and a full-blown recession resulted. If you want to know what happened to the fat bankers mentioned above, they are still fat because their bonuses are still fat. What a rotten system !

*China depends very heavily on the economy of the U.S. When I visited Walmart during my stay in the U.S. in 2007, I could not find a single product made in the U.S. More shocking was the fact that almost 60% of the products have been sourced from China. So, if the U.S. economy collapses, the Chinese economy goes for a nosedive.

*India is an exception. But we are talking too much about recession , loss of jobs etc.; it has the danger of becoming a self-fulfilling prophesy. No doubt, some jobs have been lost. But not on the scale of what has happened in the West. In fact, even in the last 6 months since recession began in the West, our lives have been better than what it was 10 years ago. Some 10 or 15 years ago, there were far less jobs created; so it might have appeared that there were no job losses then. But in the last few years, lakhs of new jobs have been created. So, even if a few thousands of them are lost, the rest is in tact. There is definitely a slow-down. Obviously, we can not grow at the same heady rate of 9% this year if the entire world outside India is suffering. But even 6% growth is good, looking at the minus growth in the West and Japan.

*The real reason for the down slide in the U.S. is the gross greed and arrogant indifference of the Wall Street whiz-kids who forgot or did not care to follow simple rules of management. But in India, the Public Sector banks being at the commanding heights, the managers were in eternal fear of taking their own decisions which would annoy the Govt. ; so they erred on the safer side and never took any decision which could have been termed as even slightly risky at all. This routine, docile behaviour suited the strange times we are in and saved the country's economy. It is a big irony. But true nevertheless.