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Monday, October 20, 2008

How the global financial crisis affects India, and what we can do about it

See this paper by Jahangir Aziz, Ila Patnaik and myself.


  1. while the effort in the paper is well-intentioned, it fails to comprehend the scope of the stress that plagues the Global Finance.

    Rupee is overvalued that is missed in the diagnosis.
    Emerging market RISK is being rerated just as SUBPRIME was rerated.
    The Banks like HDFC are yet the face the whammy of real estate loan defaults which will spike in 2009.
    The Retail Debacle with CRE bust is still to come.
    The IT-BPO bust is in its incipient stage as severe recession in the WEST forces the govts there to institute protectionist measures largely thru tax incentives
    The notion that RBI can attract NRI money now by raising NRE yield by few % is a foolish one. Just as appreciating rupee/real estate impelled the NRI herd to barge in to india, the accelerating depreciation in them is leading them to rush for the exits (by clicking that damn mouse)
    Indians should tuck themselves in, shudder and cower as the Gabbar Singh of fincial calamity is staring them at the face.

    Shah, be afraid. Be very afraid.

  2. Global Financial Crisis: Effect on India
    With the demise of Enron and Worldcom, the world saw American business executives going to jail and Accounting firms discredited. Now, we are witnessing American Credit Rating Agencies and Government Regulators being discredited. Investors, large and small, have willingly risked their hard earned earnings on advise from these 'independent agencies', the three pillars: Rating Agencies, Accounting firms, Regulators. Now there is nothing left.

    The impact of this 'Trust destruction' will reverberate for many years, and it will affect countries everywhere.

    There have been market crashes, recessions, depressions, runs on banks, bankruptcies of the last 40 years we have participated in an incredible array of financial crises from the oil shock, LDC crisis, 21% interest rates in 1981, commercial real estate debacle, 1987 and 1991 market crash, asian currency crises of 1999, dot com bubble bursting..and so on. However, in none of those events was confidence in the pillars it is in shambles. We rose up from the earlier crises stronger than before, however, this time the very pillars have been demolished.

    For countries like India which are in need of capital to intiate projects to build infrastructure the situation has grown grim. Certainly, the developed world investors will be wary...they will not trust their advisor, as they have no independent sources of comfort... hedge funds will be scrutinised and will be made scapegoats since they have no effective power source. India specific funds will become a scarce commodity. Sovereign wealth funds may be a source of capital; however, we would have to prohibit them from investing in sensitive sectors such as Ports, Telecom, Power generation, ....the very sectors where the monies are required.

    This drama of capital inflow drying up will take years to play out...we can expect the following in India:

    1. Business built on the out-sourcing phenomenon will suffer...a darwinian struggle will ensue and stronger, bigger and more efficient firms will emerge....job losses will be legion.

    2. Financial firms which have levered themselves to a sharply growing economy will suffer...NPA's will rise on personal loans as well as home loans.

    3. Real Estate firms will also enter a Darwinian struggle...those levered for high growth will die...those focussed on customers will thrive...consolidation will occur.

    4. Every business house has created either an infrastructure subsidiary or a telecom subsidiary. If the money is already committed, it was done at the peak, and will be lost. If it is just an idea then they may reap huge rewards when the cycle turns in the next year or more.

    5. Export oriented businesses are in trouble despite the weaking rupee. The consumer in developed markets has been hurt very badly and there is much more pain to come. Demand destruction is palpable.

    6. These troubled times will force consolidation in the financial sector; we cannot fund our infrastructure and business growth with our tiny banks. We need banks of size to finance gargantuan loans with government backing. Given the shrinking capital inflows there will be no other choice left but consolidation...the scale and size of this consolidation will be unprecedented and job losses and labor strife will ensue for some time.

    To conclude, if the United States loses $5 trillion in this crisis, its balance sheet will still be stronger than every other major country in the world. The problem is not just money and losses; it is the discrediting of Accounting firms, Rating agencies and Regulators that will haunt this post Crisis world. I do not know what form the future 'Independent Agency' will take, but I will not trust anyone for a long, long time. And I am not alone.

  3. Some Suggestions on Protecting the people of India from the Global Financial Crisis

    CPIM has come out with a set of suggestions to protect the interests of the people of India from the adverse impacts of Global Financial crisis. As published in the policy brief section of the Network for Social Accountability website , the CPIM press release states that the government needs to be proactive at the mement.
    The press release laments that "The UPA Government has so far chosen to meet only the corporate bigwigs and bankers in order to discuss policy responses; neither have the State Governments nor other political parties, representing crucial stakeholders been consulted. It is strange that at a time when the neoliberal vision of putting corporate profits over peoples' interest and relying upon 'trickle down economics' is getting discredited across the world, the economic managers of the UPA Government are clinging on to it. for details, visit

  4. i think you have shown great concern over the private investment.


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