Few years back globalisation was the buzzword around the world. It was assumed everywhere that with globalisation, economic development will come automatically. All countries were looking toward means of integrating their domestic economy to the world economy, basically US and European economies.
How could India be left behind, we also assumed that the world economies have to be integrated. We have to globalise. With the fall of communism the path became more imperative. There was no alternative.
Although in hushed tone we did talk of alternative ways, but it was not defined. The path was not clear; it was only conceptually delved upon. We were all confused. We formed the opinion that the lofty ideals of Swaraj and Swadeshi had more of a social relevance than economic foundations.
We are at a crossroads now. With failure of capitalism and current global financial crisis, we need to go in details the pitfalls of American Economic Model and how to disengage our economy from the current global crisis.
The fundamental difference between US and other economies is that, the western economy works on consumerism; they are based on high consumption rate, and successively increasing it to the tune of even financing it through debts. Currently US have a net debt of five trillion dollars.
What US is doing is buying produce from other countries by paying dollars and this payment of dollars is being met through indiscriminate printing of currency. They have built a system of economic structure through mega institutions like World Bank, IMF etc. Through this structure the reserves of other countries are being kept in dollars and invested in US Treasury Bills. The currency, which was issued by US to buy produce from other countries, comes back to US as investments in its treasury bills.
Further, US is successively resorting to deficit financing. It has huge budgetary deficit. Annual US budgetary deficit rose from 162 billion dollars in 2007 to 455 billion dollars in 2008. On one hand its economist advise other countries to abstain from deficit financing but it itself is resorting to deficit financing, we need to analyze the purpose behind. Then it successively devalues its currency. This devaluation helps US to bring down value of investments of other countries.
World is supplying produce to US in dollars and then investing its surplus in dollars. The money received by US is being loaned to its population without proper creditability assessment, which is now being called as Sub Prime lending i.e. lending without proper security assessment. Which was bound to fail and has failed. This indiscriminate lending itself was helping US to leverage its capital and create asset bubble, which has now busted, and the world has lost trillion and trillions of dollars in capital.
Further US has loose regulatory provisions with regard to bankruptcy laws and leveraging. It has accounting procedures and financial instruments like Over the Counter (OTC) products, which helps it to camouflage the identity of lender and borrower, and helps in avoiding provisions and disclosures of mark to market losses, till the time it chooses to do so.
On the other hand India is a saving'seconomy. We save more than 35% of our GDP. We have huge domestic market and a very large population. Sixty five percent of our population is young and working. Non-payment of debt is a stigma is our country and we have stringent anti- bankruptcy laws.
Fall of America is very certain. Dollar is very weak, but it is holding back only due to its being owned and bought by other countries.
We need to understand American situation and its fall and to take corrective measures, however difficult and hard they may be. Because the longer we wait the situation will be further worsened.
Need of the hour is to disengage our economy from global economy. Preserve our domestic market at all cost, take up massive infrastructure development projects, reduce interest rates, reduce indirect taxes, which form a very high component. (gopalagarwal@hotmail.com)
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