Wednesday, October 1, 2008

India Economy: Effects of the US Financial Crisis in India

New Delhi, 30 Sep. It is often said that when the US sneezes the rest of the world catches
a cold. This three-part series looks at how India, China, and Russia have been affected by
the US financial crisis.

Before we get into detail about how much this US problem is spreading globally, we
should understand the severity of it and the possible consequences in the US. How sick is
the US?

Some have compared the situation in the US with the Great Depression of 1929, but this
situation is far from a depression – in fact it’s not even a recession. In the Great
Depression there was no work and there was widespread poverty. People struggled
through the winter with no heating and no food. We are not seeing such extensive
suffering in the US.

In the US, August 2008 unemployment figures were at 6.1%, according to the US Bureau
of Labor Statistics. In the Great Depression unemployment was higher than 25%. The
Commerce Department reported that GDP growth was at 2.8%, hardly indicative of a
recession, although this was revised down from the 3.3% figure it projected a month ago.

But one cannot ignore yesterday’s 777 point drop in the Dow Jones Industrial Average
after the $700 billion bailout plan failed to pass through Congress. These paper losses of
more than a trillion dollars may be the sneeze that disrupts global markets.

Even before this controversial rescue plan was shot down, Indian markets took a dive of
their own on Monday 29 September. The stock market sank to an 18-month low and the
rupee a 5-year low. The stock market dropped 5.3% to 12,595.75.

According to Business Standard, vice-president of Karvy Stockbroking Ambareesh

Baliga, said, “We are advising our clients to stay away from trading till selling by
Foreign Institutional Investors (FIIs) stops. Also, there is no support to the markets from
any domestic institution. While markets are below their fundamental levels, fear has
gripped investors and there is panic selling.”

While US investors and consumers are concerned about who will foot the bill for this
$700 billion plan, to Indian and non-US markets that doesn’t matter. They just want it to
happen so as to restore confidence and of course liquidity.

Sify.com reported Jagannadham Thunuguntla, head of the Delhi-based SMC Group

saying, "The first major point of nervousness is that the US bailout plan will now be in
three tranches of $250 billion, then $100 billion and finally $350 billion and the second
and third tranches will require further Congressional approval. This means effectively,
only $250 billion is now available for buying troubled assets of banks instead of $700
billion outright. This doesn't really solve the problem of liquidity."

Crowds gathered outside the Bombay Stock Exchange to watch the markets drop, with
many investors angry. Why should failure of the world’s most advanced financial system
hurt individual Indian investors? But the fact remains that the “Bush administration's
failed economic policies” as speaker of the House Nancy Pelosi described it, is
everybody’s business.

Posted by @n!l - ThEe EnD tHaA sTyLe at 8:13 AM