Why India stands largely
insulated from global financial crisis
collapse of the mighty global financial system has triggered
a series of chain reactions in India, but the impact is not
going to be as widespread as earlier imagined. The reasons
the subsidiaries of collapsed investment banks like Lehman
are being bailed out by entities like Nomura of Japan. This
includes the 2,500-strong back office operations in Mumbai,
apart from the smaller securities set up. Similarly, American
Insurance Group (AIG) in India has a tie-up with the ever
reliable Tatas who have given a thumbs up to all consumers
who were worried about their insurance carried out through
and even more significant, is the fact that the conservative
approach to reforms in the financial services sector has ensured
that the tremors of earthquakes in the US are being felt minimally
meeting a few days ago of the regulators for the pension,
insurance and other similar sectors concluded with a sigh
of relief and pronouncement that slow and steady opening up
of the economy has helped in the long run. This is not to
say that capital account convertibility - or making the rupee
freely tradable - will not take place. But probably as the
regulators have pointed out, this can happen when the economy
is at a more mature stage.
therefore, the big losers in the global financial crisis in
this country are likely to be the iconic software firms like
Infosys, Wipro and Tata Consultancy Services (TCS). Much of
their business comes from the erstwhile giant investment banks
and that could affect their profitability in the short term.
In the medium-to-long term, however, these companies are likely
to have greater resilience given their innovative approach
in the past to hunting out new markets and customers.
other area where worries still remain is the pullout of funds
by foreign institutional investors from the country's equities
and debt markets. The bourses have been showing considerable
volatility ever since the news came in about the failure of
Lehman and the domino-like effect on other investment banks.
the Indian stock markets became volatile, they have not crashed
as might have been expected initially. They now seem to be
stabilizing as safety nets are being created for collapsed
banks, like converting Goldman Sachs and JP Morgan into commercial
banks while other banks are picking up some entities cheap
like the takeover of Wachovia by Wells Fargo.
far as the US and even Europe are concerned, the ramifications
appear to be unending as the scenario is unfolding into the
biggest banking crisis in 100 years. Financial institutions
considered to have a rock-like stability including Merrill
Lynch, Morgan Stanley, JP Morgan and the Lehman Brothers collapsed
within days of each.
were rescued through various manoeuvres and only Lehman actually
declared bankruptcy. Reports reaching here also indicate that
many smaller banks are declaring insolvency in the US - a
development not being taken note of by the international media
which is focusing on the big fish. Thus average people in
the US are facing severe hardship. No wonder then the battle
is being described as one of Main Street vs Wall Street.
complex set of circumstances that created the crisis are a
fascinating story of greed and over-reach at the highest level
of the financial system in the US. The solutions being found
are even more fascinating - at least in India. The US administration
actually bailed out mortgage giants like Freddie Mac, Fannie
Mae and the world's biggest insurance company, AIG. The bailout
has resulted in the government taking a majority stake in
these institutions including an 80 percent equity share in
AIG. In other words, the US is doing what we in India call
irony has not been lost on those in the banking industry in
prime minister Indira Gandhi was roundly condemned by the
US and other Western powers when she nationalised banks in
this country in order to ensure that credit reached the poor
and powerless. Deemed to be a socialist - or communist-like
measure -, it has now been adopted without any qualms by the
avowed world leader of free market economies. It seems the
US government had little choice, as otherwise widespread mayhem
may have resulted for the average citizen both within America
the case of AIG especially, it was recognized that the sudden
collapse of the largest insurer in the world would wreak havoc
globally. Besides the timing of these events could not have
been worse for the Bush administration as the presidential
elections are just weeks away. It thus had little option but
to carry out damage control as rapidly as possible.
the rules of the game change for Western economies during
crisis. Nationalisation can be resorted to when the American
people need to be protected but the same measure can be decried
when a developing economy needs to do so to similarly protect
its far more impoverished citizenry.
nationalization of banks in India opened the way for ordinary
people to use the financial system for small and tiny deposits.
It paved the way for what is known as compulsory priority
sector lending. In other words, banks had to provide a certain
amount of credit for agriculture and rural areas. In the normal
course, commercial banks only lend to sectors providing assured
and fairly high returns. But Indian nationalised banks have
a social obligation to fulfil and the directive to do so was
made possible only by the drastic takeovers effected by Indira
Gandhi in 1969.
from banks, many other industries had to be nationalized to
prevent millions of workers from becoming jobless. The perennially
loss-making National Textile Corp is one such case when the
government had to step in as private mill owners were closing
shop and leaving their workers in the lurch. Though the corporation
and its regional subsidiaries have rarely made profits, the
mills under its charge have also performed a social obligation
by producing cheap cloth meant for weaker sections of society.
No doubt the nationalization process was carried too far,
but at the time it seemed the only way out to save jobs in
a country without any social safety nets for the jobless.
there can be few tears shed in India for the plight of the
US economy. Our focus should only be on how to deal with the
fallout of the financial disaster that has overtaken the global
bastion of free markets.
Ramachandran is an economic and corporate analyst. She can
be reached at email@example.com)