We in the financial crisis

There are two major lessons to be learned from the US financial crisis: one, just as the fall of the Soviet Union signalled the end of Communism, the fall of the investment banks signals the demise of capitalism as we knew it; and two, them guys wid their fancy ties and financial models don' know nothin'!

Our PM can smile smugly from behind his beard, and maintain the myth about India being insulated and therefore not subject to slowdown. This reminds us uncannily about the East Asian financial crisis during which we smiled just as smugly, although then it was the current Finance Minister doing the honors. No matter - this time as earlier, somebody else will be picking up the pieces.

Currently, our domestic list of woes includes suffering from insidious fiscal and trade deficits, manufacturing slowdown, and stubborn inflation. Our corporate honchos can emphasize the $700 billion investments in the pipeline, and maintain that growth cannot possibly come down by much, given our 54% below the age of whatever. However, so far growth has been solely due to the good monsoons, and no one can expect that to continue forever.

So if the corporate sales and revenues are intact, where is the manufacturing slowdown happening is the question. (BTW, this has nothing to do with the US crisis so far - we have come to this state of affairs on our own steam.) CMIE may talk about a faulty index of industrial production, but nobody mentioned that when the manufacturing sector was growing at 12%. The answer could well be that the interest rate hikes have halted expansion in the non-corporate sector, which is a better bellwether of economic winds than the corporate sector which is full of guys wid fancy ties.

Add to this the wealth impact of falling stock prices and real estate, and the only people happy in India are the ones on the millionnaires list. What really upsets me is the talk of overheating in the economy because of which interest rates have been tightened. In an economy of massive unmet demand, business cycle theories as well as money supply theories need to be out the window. But that is another blog.

Examining the impact of the US financial crisis seems a pretty redundant exercise, when we are already doing our level best to stifle growth. Investments in India may get dented due to the financial crisis in the US. Expect shelving of FDI plans. Exports may or may not be affected, depending on the downward shift to lower cost products by consumers in the affected countries. Certainly our gems and jewelry exports will get hit, but the other export fast-mover, petroproducts, will in any case not lower employment as it functions on capital equipment. IT exports again will suffer in the short-term, until financial restructuring gets underway in the US and companies turn to our low-cost financial-cum-IT wizards. The poor miserable rest-of-the-country will remain unaffected, except possibly prone to some gloating.On the whole, the scenario may not be totally unpleasant, provided the monsoons cooperate.

What would be a major disaster would be the set-back to financial sector reforms, just when so many committees had been set up, so many learned reports had come out, so many Communists had been booted out of the government, and reforms were finally gaining some traction. At least, let us not re-learn the mistakes following the East Asian financial crisis, when we smiled so smugly that we forgot financial reforms.