Should the free fall in the Wall Street worry India? Yes. It is not only the question of a few thousand crore lost by India as the US has got into funk. There is turmoil in the derivatives. Jobs are lost and the ridiculously high salaries offered in campus recruitments in IITs and IIMs will make a more realistic adjustment. But for those who pin their hopes on India there is a great chance.
Few years ago India celebrated the Dalal Street integration with the Wall Street. The market boom spawned fly by night billionaires. Financial liberalisation enthusiasts in the last two years wrote volumes about the remaining task of reform as if more integration with the US was an enabling condition of faster growth. What was left to be completed was the fullest integration of Indian economy with the US. What stood in the way was the finance sector reforms, which the UPA could not take up for fear of the CPM. After winning the confidence vote in the Lok Sabha Dr. Manmohan Singh government was desperately trying to pursue the task.
The big crisis in the US economy that has resulted in the actual nationalisation of almost half a dozen financial entities should make Indian policymakers pause and rethink. India is under tremendous pressure from the IMF-World Bank and the reform lobby to complete the financial sector reforms which in layman'slanguage means allowing the free entry of foreign banks and insurance companies to merge or take over the Indian banks and insurance. The rest of the reforms are wrapped in the Raghuram Rajan Committee draft report and are cosmetic in nature.
The real emphasis of this exercise is to place the ongoing process of marketisation and globalisation on an irreversible auto pilot so that any successor government will be tied to the global scheme designed by the US-World Bank paradigm. The architecture of the global financial system?the phrase popularised by the World Bank after the Asian financial crisis of the last decade?has now crumbled after the initial sub-prime and now the full prime crisis of the US economy. The bankruptcy of the 158-year-old Lehman Brothers, the dollar 85 billion bail-out of American International Group (AIG), the takeover of Merrill Lynch, the largest brokering house in the US and the earlier nationalisation of Bear Stearns, Fannie Mae and Freddie Mac have shaken the foundations of the neo-capitalist system. It is now prudent for India to take a relook whether we should become a blindfolded partner of a sinking global architecture. All reports indicate the crisis in the US economy is deeper than what has surfaced so far.
In the US, the Glass-Steagall Act of 1933 had separated investment banking from commercial banking. This was done primarily to safeguard investors from the kind of speculative craze that once drove the US into the great depression of 1929. In India banks own both insurance companies and investment banks. The risk factor is higher. Perhaps it is time for the RBI to review the situation. Otherwise, Indian banking is in a reasonably healthy shape. The demand for sweeping changes to make them open to competition, is misplaced for, the idea is to let foreign banks a free run over the bountiful financial baskets in the country.
The UPA is committed to financial sector reforms. In fact Dr. Manmohan Singh shares many doubtful distinctions with George W. Bush in mismanaging the national economy for the comfort of a selected few. This aspect we will examine next week. The Economic Survey 2008, listed the priority areas of reforms as: allowing 100 per cent FDI in Greenfield private rural-agricultural banking, and allowing buy out of other private Indian banks, raising foreign equity share in insurance to 75 per cent, covering all areas of human life. Banking, as we know in a free market economy has collapsed in America. Most banks even do not know their net asset value. For, the huge credit exposure and the subsequent real estate boom and the bust wiped out their stocks. Look at how cheap Merrill Lynch sold out.
The UPA enthusiasm could prove lethal for the Indian economy. The global financial markets are not transparent. The risks are unknown. Thomas L Friedman, the author of the famous The World Is Flat title on globalisation described America'scrisis in the financial industry as the outcome of an excess of liquidity and greed. Lax monetary policy allowed Americans to build up debts and fuelled a housing bubble that finally burst.
At last globalisation is under fire in America. Free trade is being monitored. The absolute faith in the omnipotence of market is shaken. Even books that have become bestsellers are discussing The Post-American World. A lead article in The Economist (July 26-August 1) consoled Americans not to be envious about the narrowing economic gap between America and a rising Asia consisting mainly of China and India. Open markets and deregulation are being replaced in the US with open intervention of the state to regulate and nationalise. It all happened because America has grown accustomed to extraordinary prosperity, avarice, overspending, gambling and speculation. Is not it time for India to rethink on derivatives and future trade, two other prescriptions of World Bank economics? According to a report the Finance Ministry has asked the RBI to reexamine norms governing derivatives exposure of banks. Immediately, India has to contain the fall-out of US crisis in the Indian banking sector. Indian commercial banks as of now have considerable exposure to derivatives which are dependent on third party commitments. They are expected to suffer losses of thousands of crores. The same is true for realty funding. Some experts believe that India too is on the verge of a sub-prime crisis.
The 2008 IMF India Report on financial globalisation analysed India as ?not very financially globalised? and concluded ?it is fast globalizing by opening its economy to capital inflows?.
Along with the American banks American capitalism is also collapsing. What the American crisis has exposed is that the risks involved in the architecture of the global market unleashed by the uni-polar world are beyond the comprehension of the experts managing them. That is why the World Bank which asks all developing countries to follow the American model could not prevent the collapse of the financial system in the Mecca of capitalism.
(The views expressed in this column are personal. The writer can be contacted at [email protected])