2009

The Global Economic

Crisis
The severest ever Capitalist Crisis under lens
The paper unravels the present Economic Crisis, scrutinizing its effect and impacts
in two different parts. Part I deals with the fundamentals of the present Crisis
taking an in depth look into its causes, and the agents who seek their vested
interests through this Crisis. Part II places India under the lens of broader
economic analysis and would at best be giving a dank time to those who have
been complacent regarding the impact of Crisis and have been placating
themselves with the notion of “Insulated India”. It’s time to delve deep and think
reasonably about the tortuous paths which lie ahead.

Shreeda Chungkham | Syed Shoaib

 The Prelude:
Asking “WHY?”
When Enron was one of the corporations which gleamed in the basking pride of Americas’ economic
success (or better to say, that of its corporations), it used to be seen and exampled as a role model for
other corporations. One of their defining slogan as “Enron” was asking “why”. I can still glimpse their
entry into Broadband Services market (2000) with their market championing campaign where Enron
asked, “7pm to 7am we are paying for bandwidth which we are not using… WHY?” (Advertizing for its
own plan, which just though being a failure, raise Enron stock prices by 34% in two days) and then
Kenneth Lay adds, “One of the things at Enron is always to ask why”. Today Enron is no more; it
remains though a living paradigm of being one of the greatest corporate frauds in history and the
lessons to be learned from it. However one thing of Enron worth emulating is to ask “why” and most
importantly in our times, where things in multitude are unraveling themselves with such speed that
could change the economic and social aura of earth in mere number of years. And most of these
unraveling changes are for the worse – Geo Political struggles (the wars in Iraq, Afghanistan), civil strife
in Africa (Zimbabwe, Sudan etc.), The Current Global Crisis and much more. Believe me, one of the most
interesting things at this time is to ask Why…

Why did every intelligence apparatus fail on the eve of 9/11? Why did US go for rebuilding Iraq, when it
had New Orleans devastated (and far from recovery of course yet today)? Why did it portray Iraq as a
source of Chemical Weapons when constantly doubts were being expressed over whether it had any,
and then found its portrayal, a justification enough for bombing out the nation? Why did US continue
with its mammoth war expenditure when it could not finance it itself and that the burden of debt had
been overgrowing constantly? Why did officials like Alan Greenspan prefer to let the housing bubble and
then hope to sweep the mess later when it would burst? Why did the Congress and FED constantly
belittle the constant predictions of savaging Economic Crisis which were apparently there, not only from
Paul Krugman but from a number of fronts, viz Nouriel Roubini, GAEB (a European Research
Publication)? Why there had been so many outside fears and criticisms of US financial system and
dangers had been so apparent to these economists but unfortunately (or what else) not so apparent to
the Congress and FED, where they hold to their credit the most developed information systems?

These are questions worth asking because we being human beings, after all are the worst to receive of
these consequences. Shut down of manufacturing activities, mammoth employment losses, loss of
peoples’ savings etc (and of course the immense looses of life and freedoms of people on our planet).
are reasons perhaps substantial enough for letting us ask these questions for reasons and devotion
greater than that would be for the sake of simple curiosity.
 THE BAD of
BASICS

All the time the US congress and Fed had been busy pronouncing laurels for their Economic system
every time their economy had been ailing with innumerable economic and social problems. And all the
time this utterly badly structured system had been forced upon nations in the name of structural
adjustment program leaving them open to the same predicaments
● ● ●
US has faced in front of our eyes.

I would like to delve deeper into the subject of what is so wrong Why did our leaders
about the financial system than into the chronology of Crisis since encourage the
its well known and data on it is profound in most circles of deregulation,
economic and political knowledge. However I would touch on a
encourage the
few chronicle aspects which I think are not as profoundly
understood and mentioning them is a must for understanding the
leveraging and risk-
severity of this Crisis. taking, and completely
miss or dismiss the
Jeremy Grantham1 describes the present economic crisis as “The
poisonous wind we all swallowed”. Regarding the years preceding
growing signs of
2008, at the time of a "remarkably lucky global economic" climate trouble and what we
he called "near perfect;" in January 2007, he observed that described as the 'near
"Against all odds, Goldilocks tiptoed through the perils of the first certainties' of bubbles
(2005) and second (2006) year of the Presidential Cycle (and) 2006
breaking?
was the rarest of rare birds - a perfect year;" it was "the best year
in the entire history of finance for the selling of high credit risks at
low premiums" and sowed many seeds for the current debacle; it
produced what Grantham called "the first truly global bubble in all Jeremy Grantham
asset classes everywhere with only a few modest exceptions;"
● ● ●

1
Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van
Otterloo, an American investor well known among institutional investors, but
relatively unknown to retail investors. He is regarded as a highly
knowledgeable investor in various stock bond and commodity markets.
The way high credit risks were sold at relatively low premiums and
the understanding of it as an indicator of fundamentally strong US Debt: the fuel of speculation; with
economy is evidently one of the most major reasons for the enough, prices can be wildly
inflated; "in many respects, the
present economic nightmare. Furthermore instead of tightening
borrowing mania makes all
the credit market, government went with deregulation (regulations previous debt manias pale by
were almost nonexistent where they were they should have been) comparison;" by mid-2008, the
in an extremely negligent fashion. The combination of a favorable Fed reported $14.8 trillion in
outstanding US mortgages or 40%
climate and cheerleading by authorities "produced an even more
more than the official national
poisonous bubble - that in risk-taking itself;" the idea being that in debt and triple the total of all
the event of trouble moral hazard will lead to rescue, so go as far mortgages a dozen years earlier.
as you can. In such a climate it looks as if moral hazard on the part Even worse, was the quality of
of investors was coupled with the acceptance of the concept of debt. Dangerous and substandard
because all types of speculative
rational expectations on the part of authorities, the idea being
lending proliferated. Requiring no
“we're "far too sensible" to let major bubbles appear let alone get proof of an ability to repay. No
out of control” down payment so even low
income households could buy
One of the most famous assertions of Grantham has been that all unaffordable properties or even
markets revert to their mean values from their highs and lows. No more than one. And even pay
interest only or less than the full
exceptions, and getting there is very bumpy. Nearly always by way
amount.
overshooting. Further, the larger the bubble, the greater is the
overshoot.2 US markets haven't been cheap since 1982 - 1983 and It's no surprise that a majority
have been "permanently overpriced since 1994." Hence a "terrible made the smallest required
caveat." Unfortunately this caveat is much more serious than what payments and accrued unpaid
amounts to their loan balances.
we have ever addressed. Seeing this Grantham calls the present
The more payments they made,
scenario as just the beginning and that it is near impossible to the deeper in debt they fell.
predict the bottom. Today’s marketplace being global is much
more complex to comprehend and this complexity is coupled by a It gets worse. Unlike past
speculative periods, non-lenders
large number of financial instruments very difficult to comprehend.
this time hold most of the
Soon we would discuss the impacts of what is called derivative mortgages - "institutions and
trade and market manipulations which are hurting the common investors far removed from
man so dearly. borrowers." And the $14.8 trillion
in residential and commercial
But before proceeding further we must ask the impending question mortgages is compounded by
– Why? Why did not the government come up with effective another $20.4 trillion in consumer
and corporate debt. As a result,
regulations on time? Why did not the investors restrain from taking
Americans are pressured on
such large risks. An Economist provided two theories to address multiple fronts - unaffordable
the question of investors’ dumb mindedness: mortgages, credit card and other
loan balances, combined with
mounting layoffs and
2
Until the greatest ever 2000 equity bubble, the three most important 20th centuryunemployment. A potentially
ones were in 1929, 1965 and
lethal combination.
Japan at end of 1989. All three overcorrected by more than 50%. Today, we have "a more global, interlocking, and
complicated system, including non-bank players like hedge funds." We've also got destabilizing derivatives in a
Martin to
totally unregulated market. Is a 50% overrun likely? Grantham thinks governments will do anything Weiss
prevent it
and with luck they will, but not entirely.
 1. The first based on "career risk" or what he calls "the Goldman Sachs Effect: Goldman increased
its leverage and its profit margins shot into the stratosphere." Eager and needing to keep up,
other less talented banks copied them "with ultimately disastrous consequences." They had to
because "woe betide the CEO who missed the game....The Board would simply kick him out" and
replace him with a "gunslinger."
2. Theory two is harder to prove: "that CEOs are picked for their left-brain skills - focus, hard work,
decisiveness, persuasiveness, political skills (and with luck) analytical (ones) and charisma. The
Great American Executives are not picked for their patience." For wasting time "thinking about
history and the long-term future. They are paid to be decisive and to act now." Today's CEOs, "to
the man, missed everything that was new and different," and these elements "happened to be
vital."

We have similar lessons from the Enron and Satyam scandals where the CEOs would do just anything to
keep the stock prices up. Bubbles have occurred earlier as well but its government’s duty to keep check
on credit markets and protect peoples’ savings and earnings, then why did government exactly turn
away?

The remaining part of the analysis we would deal with covert and overt operations which exist in our
world and regularly daunt the interests of most people, and mostly these are not as clearly reported in
the mainstream media.
 The Bad of
MEN
The Covert and Overt Operations

There are a lot of explanations regarding the Contemporary

Economic Crisis, by government agencies, think tanks and
economists’ of course. Sometimes what is presented is a
[AFTER THE 1929 OCTOBER 24, 28
graphic picturesque where the economy is going down and AND 29 MARKET CRASH, THE
then suddenly it starts going up again – the theory of the WEEKLY ENTERTAINMENT INDUSTRY
Business Cycle. But let me assure it does not happen that way. MAGAZINE VARIETY (ON OCTOBER
There is nothing spontaneous in these movements. The theory 30) PUBLISHED ITS MOST FAMOUS
of Business Cycle as an interpretation for the present Crisis EVER HEADLINE: "WALL STREET LAYS
doesn’t work at all. The stock markets and money markets are AN EGG." IN OCTOBER 2008,
heavily manipulated. HISTORY REPEATED ]
They are largely manipulated by what we largely understand as
derivative trade. It’s the capability that some financial institutions as well as powerful individuals or
institutions that are not clearly visible in the financial architecture such as the hedge funds to trigger
upward and downward movements in a speculative onslaught where they can speculate in an upward
movement and they can speculate in a downward movement. They know when the turning point is
going to occur because they as well have the foresight the knowledge as well as the ability to trigger
major shifts in directions.

For e.g. rapid upward and downward movements (short term swings) in currencies often go without any
substantial economic rationale. They are speculative movements and there is money to be made in that.
Then there are instruments like short selling. Here you can make stock market go up or down without
necessarily buying or selling. And often of course disinformation concerning financial movements which
is then inserted into the circuit of financial and economic news has the ability of triggering major
collapses and let us be under no illusion that there are powerful interests behind these processes and
powerful interests behind these indicators.

For e.g. when the fate of General Motors was being discussed over the last few months, the value of
General Motors was collapsing and it was collapsing because Douche Bank, which is part of
speculative cabal had made a statement to the effect that “we put a zero price on the shares of
General Motors”. So what happens there is that coupled with speculative backing to that assessment,
the stock values of General Motors collapsed. Whether the company is doing well or not is not the
issue, the issue is that the collapse of a troubled company can occur, but you can also trigger the
collapse of any other company, which happens to be the object of these attacks.

Warren Buffet called on derivatives as “as Financial Weapons of Mass Destruction”. He called them to
be so complex that only a few understand them, and many of them are for gambling , not protection or
investing; a sure recipe for trouble ; the keys to the very destruction of our Financial Architecture; as a
result trust and confidence have been hugely impaired; “a potentially lethal blow to the system and
must be addressed at any cost as fast as possible.”

The relationship between real economy and financial

Economy is severed from the fact that the latter can The real rulers in
trigger bankruptcies in the former. What is more appalling Washington are invisible
is that the dose of liberalization in both real and financial and exercise power from
sectors has been redundantly imposed upon the
developing countries as a part of the well designed neo-
behind the scenes.
liberal agenda. We would see more of that in relation to
India under, “India under lens Felix Frankfurter
The bailout packages provided by United States, say under US Supreme Court Justice
TARP program, hardly can do anything to bail out the
Economy out of Crisis apart from bringing other social
catastrophes.3 Most of these packages simply handed over to banks are used take over undervalued
assets of real economy (undervalued due to the Crisis). Thus the whole bailout money is wasted into
speculative activities hardly bringing any good.

It was the Financial Services Modernization Act (1999) which is responsible for such a scenario. This act
removed the Glass Stiegel Act and invited risk taking on the part of investors. It not only provided excess
of freedoms to the bankers and other investors but it brought lifelong savings of people into enormous
risk. This act brought integration at the level of bankers and speculators and lead to development of
what is often called as, ‘financial supermarkets’. So now gamblers had full access to peoples’ lifelong
savings.

3
The only way US can amass such large bailout packages is by diverting other public expenditures into bailouts.
That is handing large amounts of valuable tax payers’ money into hands of irresponsible bankers and institutions.
Recently according to a MSNBC report the US was looking forward to shutting down Public Rural Schools
For speculators (gamblers) this was a dream come true, (as much
as bailouts are). But don’t think for a moment that these
speculators are in jeopardy.
If the American
The major league of these speculators constitute of very powerful People ever
bankers, these bankers precisely run the economy and are deeply
involved with policy making. This we would discuss in the following
allow the banks
section.
to control the
The fundamental reasons for the Crisis go back to 1913, when
under Woodrow Wilson the act was passed, transferring the
issuance of
control of Federal Reserve into the hands of private Bankers. This is
one of the biggest frauds American people could actually have
their currency,
expected from their government, where the nations’ money supply the banks and
is controlled by Private Bankers. Now the government in order to
finance its deficits instead has to borrow money from FED and corporations
pay interest on it.
which would
President Woodrow Wilson who signed this act later confessed:

“I am the most unhappy man. I have unwittingly

grow up
ruined my country. A great industrial nation is now around them
controlled by its system of credit.

We are no longer a government by free opinion, no

will deprive the
longer a government with conviction and the vote of people of all
the majority, but a government by the opinion and
duress of a property until
small group of
dominant their children
Economic medicine men”4
previously meted out by the wake up
A number of policies
cupful has recently been
dispensed by the barrel.
which are there, to homeless on
be held accountable
These once-unthinkable
for the present ruin the continent
dosages will almost were adapted at the
certainly bring on behests of these
their fathers
unwelcome aftereffects. bankers. For conquered.
illustration, take the
Warren Buffet referring to
example of removal Thomas Jefferson
Bailouts of gold backing from

4
Woodrow Wilson, September 25, 1919
the US currency and the present currency being mere paper in its
intrinsic value. This Act provided the pathway for printing endless
currency notes, while the FED bankers knew that all the money would
land back with them with enormous lending to the government. And
unsurprisingly so, now US government owes trillions of dollars in debt
to the Federal Reserve itself. Alan Greenspan himself commented:
Foster quoted Baran and
“In absence of the gold standard, there is no way to protect savings
from confiscation through inflation. There is no safe store of value…
Sweezy's response to an
Gold stands as the protector of property rights…” (Greenspan)5 "irrational system."
It is quite clear that the above mentioned system has lead to and What's needed is "our
would lead to abysmal concentration of power and excesses on moral obligation to (fight)
account of it which can drive the whole world in a state of jeopardy.
against an evil and
And this is exactly what they aim by pushing all the nations of world
towards neo liberal fronts, pushing them to go for excessive financial
destructive system which
liberalization so that these speculators can have their ugly games maims, oppresses, and
therein and drive the resources as they want to. This is Financial
dishonors those who live
Imperialism. The East Asian Crisis was an ensuing result of this
speculative onslaught, where these speculators took over billions of under it, and which
dollars worth of assets as lowly prices and demanded billions of dollars threatens devastation
of subsidies.
and death to
We would discuss more and in depth on how secure India is from this
global onslaught in pages to come.
millions....around the
globe." Today, the threat
is real, growing, and
becoming greater than
most anyone imagined,
remembers, or has any
sure way to contain.

5
Alan Greenspan, Gold and Economic Freedom
November 4 election night. It was a happening at Chicago's Grant Park. Like New Year's eve in Times Square. Expectant
many tens of thousands assembled for a huge victory rally. Office buildings were emptied to let them come. They arrived
early. Awaiting official word that their man won. Eager to greet him. The new president-elect. A change of the guard. A
new day. At around 10PM, the crowd erupted when on giant TV screens CNN called it for Obama. "Yes we can" people
chanted.

It was mass euphoria. At a time of deepening financial duress. The worst in many decades. Hitting Chicagoans hard like
many others. The nation at war on two fronts as well. A possible new one with Iran, and a new Cold War with Russia in
the wings. Out of sight and mind as Chicago threw a party and brought the whole city to a halt. Until after midnight when
crowds began dispersing

All night electricity filled the air. "Finally we have someone who will change the world," said a woman. "He'll put the right
people in the right jobs," said another. "He wants to make a difference in our country," one more. Not a hint of negativity
in sight. Not tonight at least. Tomorrow will be soon enough. Mark January 20 as the day it arrives. Inauguration day. In
the meantime, party on.

In less than three months, the age of George Bush will end and a new Obama one will begin. Will it be different or more
of the same? Will the new president be less hawkish? Less supportive of massive Wall Street bailouts? Socialism for the
rich and the hindmost for the rest? Less controlled by monied interests? More committed to public need? Main Street
over Wall Street? More eager to end foreign wars? More dedicated to a new course? Reversing his predecessor's toxic
legacy? Governing responsibly for the first time in decades? Maybe ever, but at least since the New Deal? Is anything
close to that possible? Think so? Think again.

Comparing Obama to FDR and expecting another New Deal is ludicrous. Yet with every new president hope springs
eternal. Candidates promise change (or at least suggest it) and people buy it. A new course. Racial harmony. Peace and
prosperity. Populist reform and a radical shift away from the Bush administration's toxic extremism. A deep breath please
for a reality check. A wake-up call. A cold shower.

Stephen Lendman, The Severity of Today’s Crisis

 India and the Contemporary Financial
Crisis

THE BACKGROUND:
Part II – India Under Lens

In economics we always see a contradiction to any established theory one recent case is that of
crisis. The old saying that “united we stand” no longer seems to hold true. In fact what
corresponds to the present crisis is the saying that “united we fall”. The second half of the 20 th
century saw a massive rise in the global adrenaline level make them crazy to expand the realm
of globalization. But it cannot be denied that there is always a limit to everything and the world
seem to have overexerted itself as it is now showing sign of nervous breakdown because the
global spinal cord of capitalism is under threat of crumbling into pieces but there is no shortage
of surgeons who with their own limited expertise is trying to join those pieces or even
substituting with a titanium one to make it even more indestructible. But the success of the
surgery depends on many factors. When trying to integrate the world into a single entity it
undoubtedly make every make every participant crisis prone. When the brain stops functioning
properly rest of the body also goes hay ware. India being a signatory of WTO no doubt cannot
be ousted from the global development and this is why the earlier claims of the so called
learned Indian politician or policymakers so genuinely wrong in claiming that India has the
requisite antibodies to foil the global turmoil. But alas this is a new disease for which no
antibodies or vaccination has developed. And the ability to develop an antidote at the earliest
holds the future of capitalism which sometime back was the voice of every right wing learned
people.

With regard to India the first sign of infection became apparent when the downfall of the Wall
Street shifted the bullish SENSEX into a bear run toppling the whopping 20000 mark to below
10000 mark in a matter of few days

But the irony was that the BJP who itself is a pioneer of capitalism thought that they could use
this incident as a political slogan to topple the Sheila dixit government but they were paid in the
same coin for making hole s in their own plates. The left were not behind in taking credit of
failing the proposal of full capital account convertibility and thus saving the Indian financial
system from being infected. Kudos to them. But very soon they are going to lose their
credibility because even if they themselves come to power in this election they have to open up
the capital account under the agreement with the World Bank.
 Crisis and the Changing
Global Perception
The present crisis have defragmented the whole globe into three groups: one the pessimist like Warren
Buffet who claims that the present crisis won’t be solved in the next 77 years on the other extreme are
the overoptimistic group comprising of the right wing economist like Montek Ahluwalia for whom this
crisis is a short term holiday from the general course of capitalism. The third and the clever ones are
those guided by the Buddha’s preaching of middle path thus claiming that this crisis is deep enough and
thus will take a few years to bounce the economy back on the fast track. Well nobody is right and
nobody is wrong in making such claims. Because unlike the great depression of 1930s or those of 70s
this one is a hell lot more complicated because it is no longer limited to the political boundaries of the so
called industrialised countries and also this is a cumulative effect of the way the global economy was
functioning behind the veil of global integration. As a matter of fact in 70s the capitalist nations in order
to sell their overproduced commodities introduced globalisation and thus complete the capital circuit of
M-C-M’. But soon when every nation stared doing that the world as a whole faces the realisation
problem as the income was not enough to purchase all the produced commodities. But the so called
capitalist hunger came up with two fantastic innovations which in the form of remedy was nothing but a
sort of putting the world on arsenic poisoning which would slowly cripple the world. They were the
credit system and the stock market. The credit system was a boon for the materialist who seems to be
inspired by the saying of Keynes that “in long run we are all dead” went for spending sprees which
further push the global system into a crisis situation. The bindas life of the west was further catalysed by
the development of stock market which changed the organising principle of capitalism from M-C-M’ to
M-S-M’ i.e. money capital going into stock market and instantly getting converted into more money at
the stroke of a computer. What a mess people just don’t seem to learn from the old wisdom that “hard
work always give sweet return”. But the saying that “as you sow so shall you reap” because the windfall
gains of the recently claimed “greedy” stock market investor now find their million dollars gone just at
the blink of their eyes. Where have all their savings gone. Nobody knows.

Seeing the scenario Marx who till now was thought of as an obsolete mindless philosopher became a
hero within days even for those who few days back working under the corporate firms earning millions
of dollars, living a kings life came to crowded and troubled streets from the wall street. Also Keynes who
had recently lost its significance became a messiah as many economists turn themselves into Keynesian.
But history says that different saviour comes at different circumstances and as for the present crisis who
will be the “ONE” nobody knows we can just wait and watch.
RATIONALE FOR THE PERCEPTION THAT INDIA IS INSULATED
FROM THE FINANCIAL CRISIS:
In this regard left raises the first voice that because of their efforts the Tarrapore committee
recommendations of making capital account fully convertible wasn’t materialised. Sounds convincing
but it is heartening to know that this insulation from the external financial shock will be short lived
because anyway India has to open up its capital account by 2011 when the agreement with World Bank.

Some economist even resorted to the cultural dichotomy between the east and the west to explain
India’s insulation. They claims that the youth of the capitalist countries are more materialistic and in
order to satisfy their internal urge of leading a luxurious life go for purchasing spree which as mentioned
above has its own problem . On the other hand the Indian counterparts woven by families ties usually
live under the umbrella of their parents and thus very least possibility of getting access to the credit card
system. This restricted spending over income to a large extent.

It is indeed true that our financial integration with rest of the world is very limited. This cannot be
denied and thus is another reason why people see India on the safer side. But with regard to trade
despite being one of the least open economies of Asia has a trade volume which accounts to 40% of
GDP.

Thus whatever be the justification for the India’s isolation from this crisis it all crumbles down when
analysed properly implying that India’s isolation is merely a notion of the over optimistic brigades.

INDICATORS OF THE RECESSIONARY IMPACT OF THE FINANCIAL

CRISIS IN INDIA
As early as April 2008 the eyebrows were already raised about the US financial crisis
transcending into India but at that time we were preoccupied with internal inflation
management which made us neglect the issue. But there is no doubt that the so claimed strong
fundamentals failed to keep India aloof from the global turmoil. The pay cuts and the firing out
from job means the adventurous and the fun loving westerner will cut down on their travel
expenses. True indeed when the Wall Street crumbled and the crisis became undeniable India
observed a massive fall in the number of tourist visiting India. This already shaken tourism
industry was further traumatised by the Mumbai terror attack which saw more than 30% of the
tourist cancelling the reservations this impacted the hotels and the aviation industry the most.

This has many negative multiplier effects because many tourist spots in India supports a large
locally concentrated informal industries. Thus there was a growing unemployment in the
informal sector. This also impacts the transport sector.
What most firms in the west adopted was an easy way to cut operating cost. The vibrant young
global population who till now lured by the huge pay packages offered by the private firms
criticised public sector on the ground of efficiency and adored the hire and fire rule as the way
to increase efficiency. But this crisis proved such perception to be one of their greatest mistakes
because companies without considering any moral ground started firing staffs. The kick out
employees now must be envying their public sector counterparts. The massive firing of staff
severely hurt the BPO industries in India as it is no longer hiring any new staff and a shocking
incident was that of Noida where the CEO was killed by the mob of fired staff.

Another sector very badly hurt is that of export because even the depreciating rupee seems to
be inadequate to drive up the external demand. Rather than reflecting a trade surplus our
balance of trade is continuing to show an ever expanding trade deficit and it had amounted to
$60 billion in H1 2008-09.hitherto the rising commodity prices and strong demand from
emerging market and oil producers which was bolstering economic growth is no longer there.
And despite being one of the least open economy in asia has external trade which constitute
40 % of the GDP.

Another indicator of the impact of crisis is the massive pull out of FII in billions of dollars fuelling
the depreciation of rupee and RBI in an attempt to check the decline has drawn down its dollar
reserves by almost $100 billion in the last few months.

A very recent shock that defied all earlier predictions was the low fig of the GDP growth rate in
the third quarter which was pegged at 5.3%.this was fuelled by the poor performance of
industry down to around 3% from the mammoth 9% a year back. Also the optimism of a good
monsoon crashed as the agricultural growth rate was down to around 2% against the expected
4% growth. Manufacturing, services and electricity generation etc also nosedived.

BUY AMERICA POLICY:

The largest capitalist nation of the world who with its muscle power has always been trying to convert
the world into a capitalist society where there will free trade and capital flows suddenly seems to be
backing out from its own stance. Instead of trying to solve the current crisis by leading from the front as
it has always done whenever it smelt any benefits coming by, it itself have resorted to the policies which
it has till now vehemently criticised and even term as “beggar thy neighbour policy”. What an irony all
the promises of a better world under president Obama now seems a farce.

Being a democratic candidate we shouldn’t be surprised that he is taking up such action as the “Buy
America Policy”. What a patriot. It might seem patriotic to the uncompetitive Americans who rather
than competing fairly with the talent pool of the East resort to such double standards. But mark it that
he will never be forgiven by the next American generation who will very soon realize that all he did was
postpone the real burden to the coming generations. The next few American generation will no doubt
hold strong grudge against their processors as the war against terrorism and those against Iraq already
runs into trillions of debt which will be collected from the coming generations along with an interest.
The buy America policy will only aggravate it. It will be interesting to see how the WTO will respond to
such policy which destroys the very essence of free trade.

The stimulus package of $800 billion under “Buy American” clause imposes restriction on the use of non-
American material in all the public works programmes that will be funded by the stimulus package. In
addition, firms and banks receiving rescue funds from the govt. may face restrictions on hiring foreign
workers. Similar policies are also pursued by European government. But such protectionism will not
trigger economic growth nor will it bring an end to this recession. It will only increase cost of production
and result in inefficient allocation of resources. In the short run, it will also trigger retaliations from
trading nations. In long run this will reduce global competitiveness of local manufacturers and the
efficient and competent industries or companies like Microsoft, Intel, and Boeing etc will be on the
losing end if India, China and other trading partner imposes tariff son the goods produced by these
companies. However under the 1995 WTO agreement on govt. procurement US will allow imports from
the 38 nations who are its signatory but its major trading partner like India, China and Brazil will be
subject to restriction as they haven’t sign the agreement. So Obama now has to work on separate
agreement with these countries.

It will be interesting to see the development of the G20 meeting which will be held soon as India is
already committed towards foiling any protectionist policies that other countries might adopt.

WHY THE SERVICE SECTOR CAN’T SAVE INDIA FROM

RECESSION:
Few months back the midterm review of the economy claimed that India has an exceptionally large
service sector which would suffer the least in a downswing and thus prove India to be more resilient
than other nations. But in reality that’s not the case because as the world development indicators 2007
of the World Bank shows that India’s services share of 53% of the GDP makes it a services laggard even
in South Asia(66%).

The false perceptions with regard to this sector comes from fact that the IT services has made India
world famous for computer software, BPO and KPO and its export have grown from almost nothing in
2007 to $40 billion in 2008. But trade hardly figure in national accounts. The standard breakup of
services in CSO accounts list four main categories: trade and hotels; transport and communication;
finance, real estate and housing; and community services. Presumably various IT services are distributed
within these categories. In the 10th Plan period the first three categories have grown faster than the
GDP, showing that services dynamism is very important for India but this is a common global
observation.

Of the above mention four categories trade and hotel won’t be resilient in recession. Transport and
services represent a mix picture of poor performance in transport but huge growth in telecom. Finance
and real estate also shows a mix picture but the community services will be boosted by the full
implementation of the 6th pay commission. Thus our services sector which is below the global standards
can’t insulate us from the global slowdown.

HARMFUL EFFECTS OF THE POPULIST POLICIES

The year 2009 will be a landmark year for many reasons. After the world was wrapped in the sorrows of
crisis the victory of Obama gave some hope. Since assuming office in January he has hardly undertaken
any remarkable steps to push the global economy out of the slumps rather his policies has faced many
criticism from round the globe. This year more than 60 nations constituting around 4 billion will be
electing their new govt. India is one among them where around 700 million will cast their votes.

As the election is drawing near the political turmoil has already started. Every day we find the politicians
changing the allies and war of words has already turned nasty. And given the declaration that a
mammoth amount of Rs 500000 crore will be spent in this election many thinks that this amount will in
some way or the other act as a stimulus package and thus the multiplier effect it will generate will act as
factor which will ensure that the India’s GDP growth rate doesn’t fall below 7%. But it is worth
mentioning here that this amount will hardly be spent for productive purposes. As Mayawati one of the
strongest contenders for the post of PM has already appointed people to look after liquor distribution
which has always been the political resort to lure votes from the alcoholics. A Keynesian might argue
that this will lead to production will lead to generation of income and thus a whole chain of multiplier
effect. But I would rather like to suggest that crisis is a time when a economy can restructure itself and
emerge out strongly so instead of channelling such huge amount on a product which comes with many
social problems like the case of moral policing I would suggest channelling it to infrastructure building
and the twin sector of health and education which have a whole gamut of positive externalities and
large multiplier effect and which will ensure a better society for tomorrow.

THE TWIN PROBLEMS OF DEFLATION AND DEPRECIATION:

What India is currently facing is the twin problems of a plausible deflation and a never ending
depreciation. This seems to be a mockery of the stability of the stability of the global economy.

A year back India was facing a skyrocketing inflation crossing the double digit mark and touching a
mouth gaping 12%. That was the time when government was trying desperately to control it but failed
to do so as it was the case of imported inflation and domestic measures were not strong enough to
tame it. This was the time when the saffron brigades had come on the streets to condemn the inability
of the ruling government. But today the situation is entirely reversed. The last week WPI represented a
minuscule inflation rate of 0.44%. This has triggered the fear of a possible deflation. If not checked it will
mean further fuelling the downswing of the GDP growth rate which has already came below the 6%
mark. But the irony is that the food prices have not come down, it is still high implying that the hard
times of the poor are now going to still harder. A possible solution will be discussed later on.

Similar is the case with our exchange market. Two years back when the rupee was appreciating and
touched the high of Rs.39 per dollar the exporters were concerned about losing competitiveness in the
global market. Now the tide has turned and the exchange rate has breached the 50 mark and is
currently standing at Rs.51 per dollar. But the financial crisis stole the would have been smiles from the
exporters since the global demand is so weak that despite having a competitive advantage doesn’t have
any corresponding global demand. The RBI’s effort to check this downswing hasn’t paid off despite
drawing down hundreds of billions of foreign reserves. Hope that the situation will become better in the
coming days.

AUTOMOBILE AND TELECOM SECTORS THE TWIN

PATHBREAKERS:
When the economy is desperately trying to restrict the downward swing the twin industry of
automobiles and telecom seems to be riding out of the storm hardly unscratched.

Recently the India’s telecom sector has crossed the landmark of over 200 millions mobile users.
Although given the population of over 1000 millions the teledensity seems to be far behind the global
average but in absolute number of users it is next only to China. And is no doubt the fastest growing in
the world. Over the last few months since depression has hit the market the monthly addition of mobile
users is over 1 million which is quite incredible. And depression has fail to deter some determined player
from carrying out expansion program for example the arrival of Aircel in Delhi. This sector will soon get
further push ups when the long awaited 3G spectrum will be available for mass use.

Tomorrow the much awaited first people car of India – NANO- will hit the Indian roads for the first time.
This needs a special mentioning in the context of crisis. Because to ride out of the depression
technological innovation, creation of new product, and creation of the new market plays a very crucial
roles and NANO is a conglomerate of all these features. This has created massive employment
opportunities during this bad time as TATA has opened up exclusive stores and servicing centres in the
rural and suburban regions. Also the focus of many automobiles company has shifted to developing low
cost model. The story doesn’t end here TATA has a whole gamut of new model which will be hitting the
Indian road later this year and early next year. This sounds crazy at this time but Indian market is a
special case as reflected by the increasing automobile sales over the last few months.

THE POST CRISIS WORLD OF BRICs:

An alternative power bloc that is gaining popularity recently is popularly called BRICs. This group
comprises of the “trillion plus” emerging economies of China, India, Brazil, Russia, Mexico and Korea.
The forecasted infrastructure invested in these markets for 2008-17 is pegged at $21.7 trillion. Although
all these nations are facing problems of different forms some with liquidity problems, some with
depreciation and so on. But all these nations have accumulated huge foreign exchange reserves beside
being supported by Federal Reserve which has committed USD50 billion to each of these nations in
currency swap agreement. There is no doubt that when the world economy gradually recovers from this
crisis the new expansion cycle will be dominated by the BRIC economies. India and Brazil will continue to
benefit from the “demographic dividend” with a growing working age population. Russia will be
consolidating its influence in regional and world affairs as a global supplier of energy and military
technology. Brazil in addition to being one of the largest commodity producers is also becoming a major
competitor in high end technologies, with a competitive edge in clean techs and renewable energies.
 Way Ahead
This economic crisis establishes new rules, throw up new opportunities and redistributive power. In
order to become the new ruler of the new economy we need to grab those opportunities. In the
aftermath of this crisis it is undeniable that the markets will shift towards the east and big emerging
economies like India and China will bear the burden of keeping the world economy moving. A new trend
will be that of the shifting battlefield for talents in which India has a strong lead but the outmoded
education system of India will imply a situation of excess demand. For the focus should be more in
imparting industry relevant training. Taking account of the already battered ecosystem the target of
every company will be to go Green. This crisis also calls for a new industry structures characterised by
flexibility, cost effectiveness and development of futuristic tools.

The focus should be given to rural India which is doing well because of the good harvest, high MSP,
expanding employment guarantee programs and rising minimum wages in many states. This growth
momentum needs to be maintained. We can also adopt the Mexican idea of “conditional cash transfers"
to poor households which enables and encourages those household to invest in their children’s health,
nutrition and health.

Over the last few months we have seen govt. coming up with various stimulus packages. In this regard
we have seen RBI following an increasingly easier monetary policy. But such operations are being done
through money market measures such as repo and cash reserve ratio, which are direct, short term
measures of intervening as compared to the bank rate which impacts the economy through a more
indirect transmission system. Thus in the current circumstances a prudent and judicious mix of
expansionary monetary policy with a fiscal policy where public investment provide a strong
complementarities to the private sector would be most effective.

As mentioned earlier the resilience to this recession can’t be provided by the service sector rather it is
the agricultural sector that can act as a saviour. No doubt it was performing very well in the past few
years showing an average growth of around 4% but this year it has come down to 2%. This signals bad
days ahead. This is also one reason why the WPI besides being down to the lowest of 0.44% triggering
fear of deflation shows rising food prices. Unlike other orthodox suggestions here I would like to give my
own views. This situation can be effectively dealt with by shifting the focus of agricultural supply toward
the north-eastern region of our country. This region has massive agricultural and horticulture potential
and the high productivity means that the potential supply can bring down the food index spiralling
down. This has many associated benefits. This will provide markets for the agricultural products of this
region thus generating huge employment opportunities. Also this will call for better transportation
facilities which will again generate employment and ensure efficiency. And most importantly it will help
in reducing political instability and which again will reduce the mammoth military expenditure of this
region which can be diverted for productive purposes.