The Global Economic Crisis

2009

The Global Economic Crisis The severest ever Capitalist Crisis under lens The paper unravels the present Economic Crisis, scrutinizing its effect and impacts in two different parts. Part I deals with the fundamentals of the present Crisis taking an in depth look into its causes, and the agents who seek their vested interests through this Crisis. Part II places India under the lens of broader economic analysis and would at best be giving a dank time to those who have been complacent regarding the impact of Crisis and have been placating themselves with the notion of “Insulated India”. It’s time to delve deep and think reasonably about the tortuous paths which lie ahead.

Shreeda Chungkham | Syed Shoaib

The Prelude: Asking “WHY?” When Enron was one of the corporations which gleamed in the basking pride of Americas’ economic success (or better to say, that of its corporations), it used to be seen and exampled as a role model for other corporations. One of their defining slogan as “Enron” was asking “why”. I can still glimpse their entry into Broadband Services market (2000) with their market championing campaign where Enron asked, “7pm to 7am we are paying for bandwidth which we are not using… WHY?” (Advertizing for its own plan, which just though being a failure, raise Enron stock prices by 34% in two days) and then Kenneth Lay adds, “One of the things at Enron is always to ask why”. Today Enron is no more; it remains though a living paradigm of being one of the greatest corporate frauds in history and the lessons to be learned from it. However one thing of Enron worth emulating is to ask “why” and most importantly in our times, where things in multitude are unraveling themselves with such speed that could change the economic and social aura of earth in mere number of years. And most of these unraveling changes are for the worse – Geo Political struggles (the wars in Iraq, Afghanistan), civil strife in Africa (Zimbabwe, Sudan etc.), The Current Global Crisis and much more. Believe me, one of the most interesting things at this time is to ask Why… Why did every intelligence apparatus fail on the eve of 9/11? Why did US go for rebuilding Iraq, when it had New Orleans devastated (and far from recovery of course yet today)? Why did it portray Iraq as a source of Chemical Weapons when constantly doubts were being expressed over whether it had any, and then found its portrayal, a justification enough for bombing out the nation? Why did US continue with its mammoth war expenditure when it could not finance it itself and that the burden of debt had been overgrowing constantly? Why did officials like Alan Greenspan prefer to let the housing bubble and then hope to sweep the mess later when it would burst? Why did the Congress and FED constantly belittle the constant predictions of savaging Economic Crisis which were apparently there, not only from Paul Krugman but from a number of fronts, viz Nouriel Roubini, GAEB (a European Research Publication)? Why there had been so many outside fears and criticisms of US financial system and dangers had been so apparent to these economists but unfortunately (or what else) not so apparent to the Congress and FED, where they hold to their credit the most developed information systems? These are questions worth asking because we being human beings, after all are the worst to receive of these consequences. Shut down of manufacturing activities, mammoth employment losses, loss of peoples’ savings etc (and of course the immense looses of life and freedoms of people on our planet). are reasons perhaps substantial enough for letting us ask these questions for reasons and devotion greater than that would be for the sake of simple curiosity.

THE BAD of BASICS All the time the US congress and Fed had been busy pronouncing laurels for their Economic system every time their economy had been ailing with innumerable economic and social problems. And all the time this utterly badly structured system had been forced upon nations in the name of structural adjustment program leaving them open to the same predicaments ● ● ● US has faced in front of our eyes. I would like to delve deeper into the subject of what is so wrong about the financial system than into the chronology of Crisis since its well known and data on it is profound in most circles of economic and political knowledge. However I would touch on a few chronicle aspects which I think are not as profoundly understood and mentioning them is a must for understanding the severity of this Crisis. Jeremy Grantham1 describes the present economic crisis as “The poisonous wind we all swallowed”. Regarding the years preceding 2008, at the time of a "remarkably lucky global economic" climate he called "near perfect;" in January 2007, he observed that "Against all odds, Goldilocks tiptoed through the perils of the first (2005) and second (2006) year of the Presidential Cycle (and) 2006 was the rarest of rare birds - a perfect year;" it was "the best year in the entire history of finance for the selling of high credit risks at low premiums" and sowed many seeds for the current debacle; it produced what Grantham called "the first truly global bubble in all asset classes everywhere with only a few modest exceptions;"

Why did our leaders encourage the deregulation, encourage the leveraging and risktaking, and completely miss or dismiss the growing signs of trouble and what we described as the 'near certainties' of bubbles breaking?

Jeremy Grantham ●

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Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, an American investor well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock bond and commodity markets.

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The way high credit risks were sold at relatively low premiums and the understanding of it as an indicator of fundamentally strong US economy is evidently one of the most major reasons for the present economic nightmare. Furthermore instead of tightening the credit market, government went with deregulation (regulations were almost nonexistent where they were they should have been) in an extremely negligent fashion. The combination of a favorable climate and cheerleading by authorities "produced an even more poisonous bubble - that in risk-taking itself;" the idea being that in the event of trouble moral hazard will lead to rescue, so go as far as you can. In such a climate it looks as if moral hazard on the part of investors was coupled with the acceptance of the concept of rational expectations on the part of authorities, the idea being “we're "far too sensible" to let major bubbles appear let alone get out of control” One of the most famous assertions of Grantham has been that all markets revert to their mean values from their highs and lows. No exceptions, and getting there is very bumpy. Nearly always by way overshooting. Further, the larger the bubble, the greater is the overshoot.2 US markets haven't been cheap since 1982 - 1983 and have been "permanently overpriced since 1994." Hence a "terrible caveat." Unfortunately this caveat is much more serious than what we have ever addressed. Seeing this Grantham calls the present scenario as just the beginning and that it is near impossible to predict the bottom. Today’s marketplace being global is much more complex to comprehend and this complexity is coupled by a large number of financial instruments very difficult to comprehend. Soon we would discuss the impacts of what is called derivative trade and market manipulations which are hurting the common man so dearly.

Debt: the fuel of speculation; with enough, prices can be wildly inflated; "in many respects, the borrowing mania makes all previous debt manias pale by comparison;" by mid-2008, the Fed reported $14.8 trillion in outstanding US mortgages or 40% more than the official national debt and triple the total of all mortgages a dozen years earlier. Even worse, was the quality of debt. Dangerous and substandard because all types of speculative lending proliferated. Requiring no proof of an ability to repay. No down payment so even low income households could buy unaffordable properties or even more than one. And even pay interest only or less than the full amount. It's no surprise that a majority made the smallest required payments and accrued unpaid amounts to their loan balances. The more payments they made, the deeper in debt they fell.

It gets worse. Unlike past speculative periods, non-lenders this time hold most of the mortgages - "institutions and investors far removed from borrowers." And the $14.8 trillion in residential and commercial mortgages is compounded by But before proceeding further we must ask the impending question another $20.4 trillion in consumer – Why? Why did not the government come up with effective and corporate debt. As a result, regulations on time? Why did not the investors restrain from taking Americans are pressured on such large risks. An Economist provided two theories to address multiple fronts - unaffordable the question of investors’ dumb mindedness: mortgages, credit card and other loan balances, combined with mounting layoffs and 2 A potentially Until the greatest ever 2000 equity bubble, the three most important 20th centuryunemployment. ones were in 1929, 1965 and lethal combination. Japan at end of 1989. All three overcorrected by more than 50%. Today, we have "a more global, interlocking, and

complicated system, including non-bank players like hedge funds." We've also got destabilizing derivatives in a Martin to Weiss totally unregulated market. Is a 50% overrun likely? Grantham thinks governments will do anything prevent it and with luck they will, but not entirely.

1. The first based on "career risk" or what he calls "the Goldman Sachs Effect: Goldman increased its leverage and its profit margins shot into the stratosphere." Eager and needing to keep up, other less talented banks copied them "with ultimately disastrous consequences." They had to because "woe betide the CEO who missed the game....The Board would simply kick him out" and replace him with a "gunslinger." 2. Theory two is harder to prove: "that CEOs are picked for their left-brain skills - focus, hard work, decisiveness, persuasiveness, political skills (and with luck) analytical (ones) and charisma. The Great American Executives are not picked for their patience." For wasting time "thinking about history and the long-term future. They are paid to be decisive and to act now." Today's CEOs, "to the man, missed everything that was new and different," and these elements "happened to be vital." We have similar lessons from the Enron and Satyam scandals where the CEOs would do just anything to keep the stock prices up. Bubbles have occurred earlier as well but its government’s duty to keep check on credit markets and protect peoples’ savings and earnings, then why did government exactly turn away? The remaining part of the analysis we would deal with covert and overt operations which exist in our world and regularly daunt the interests of most people, and mostly these are not as clearly reported in the mainstream media.

The Bad of MEN The Covert and Overt Operations

There are a lot of explanations regarding the Contemporary Economic Crisis, by government agencies, think tanks and economists’ of course. Sometimes what is presented is a graphic picturesque where the economy is going down and then suddenly it starts going up again – the theory of the Business Cycle. But let me assure it does not happen that way. There is nothing spontaneous in these movements. The theory of Business Cycle as an interpretation for the present Crisis doesn’t work at all. The stock markets and money markets are heavily manipulated.

[AFTER THE 1929 OCTOBER 24, 28 AND 29 MARKET CRASH, THE WEEKLY ENTERTAINMENT INDUSTRY MAGAZINE VARIETY (ON OCTOBER 30) PUBLISHED ITS MOST FAMOUS EVER HEADLINE: "WALL STREET LAYS AN EGG." IN OCTOBER 2008, HISTORY REPEATED

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They are largely manipulated by what we largely understand as derivative trade. It’s the capability that some financial institutions as well as powerful individuals or institutions that are not clearly visible in the financial architecture such as the hedge funds to trigger upward and downward movements in a speculative onslaught where they can speculate in an upward movement and they can speculate in a downward movement. They know when the turning point is going to occur because they as well have the foresight the knowledge as well as the ability to trigger major shifts in directions. For e.g. rapid upward and downward movements (short term swings) in currencies often go without any substantial economic rationale. They are speculative movements and there is money to be made in that. Then there are instruments like short selling. Here you can make stock market go up or down without necessarily buying or selling. And often of course disinformation concerning financial movements which is then inserted into the circuit of financial and economic news has the ability of triggering major

collapses and let us be under no illusion that there are powerful interests behind these processes and powerful interests behind these indicators. For e.g. when the fate of General Motors was being discussed over the last few months, the value of General Motors was collapsing and it was collapsing because Douche Bank, which is part of speculative cabal had made a statement to the effect that “we put a zero price on the shares of General Motors”. So what happens there is that coupled with speculative backing to that assessment, the stock values of General Motors collapsed. Whether the company is doing well or not is not the issue, the issue is that the collapse of a troubled company can occur, but you can also trigger the collapse of any other company, which happens to be the object of these attacks. Warren Buffet called on derivatives as “as Financial Weapons of Mass Destruction”. He called them to be so complex that only a few understand them, and many of them are for gambling , not protection or investing; a sure recipe for trouble ; the keys to the very destruction of our Financial Architecture; as a result trust and confidence have been hugely impaired; “a potentially lethal blow to the system and must be addressed at any cost as fast as possible.” The relationship between real economy and financial Economy is severed from the fact that the latter can trigger bankruptcies in the former. What is more appalling is that the dose of liberalization in both real and financial sectors has been redundantly imposed upon the developing countries as a part of the well designed neoliberal agenda. We would see more of that in relation to India under, “India under lens

The real rulers in Washington are invisible and exercise power from behind the scenes. Felix Frankfurter US Supreme Court Justice

The bailout packages provided by United States, say under TARP program, hardly can do anything to bail out the Economy out of Crisis apart from bringing other social catastrophes.3 Most of these packages simply handed over to banks are used take over undervalued assets of real economy (undervalued due to the Crisis). Thus the whole bailout money is wasted into speculative activities hardly bringing any good. It was the Financial Services Modernization Act (1999) which is responsible for such a scenario. This act removed the Glass Stiegel Act and invited risk taking on the part of investors. It not only provided excess of freedoms to the bankers and other investors but it brought lifelong savings of people into enormous risk. This act brought integration at the level of bankers and speculators and lead to development of what is often called as, ‘financial supermarkets’. So now gamblers had full access to peoples’ lifelong savings.

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The only way US can amass such large bailout packages is by diverting other public expenditures into bailouts. That is handing large amounts of valuable tax payers’ money into hands of irresponsible bankers and institutions. Recently according to a MSNBC report the US was looking forward to shutting down Public Rural Schools

For speculators (gamblers) this was a dream come true, (as much as bailouts are). But don’t think for a moment that these speculators are in jeopardy. The major league of these speculators constitute of very powerful bankers, these bankers precisely run the economy and are deeply involved with policy making. This we would discuss in the following section. The fundamental reasons for the Crisis go back to 1913, when under Woodrow Wilson the act was passed, transferring the control of Federal Reserve into the hands of private Bankers. This is one of the biggest frauds American people could actually have expected from their government, where the nations’ money supply is controlled by Private Bankers. Now the government in order to finance its deficits instead has to borrow money from FED and pay interest on it. President Woodrow Wilson who signed this act later confessed: “I am the most unhappy man. I have unwittingly ruined my country. A great industrial nation is now controlled by its system of credit. We are no longer a government by free opinion, no longer a government with conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant Economic medicine men”4

previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Warren Buffet referring to Bailouts 4

Woodrow Wilson, September 25, 1919

A number of policies which are there, to be held accountable for the present ruin were adapted at the behests of these bankers. For illustration, take the example of removal of gold backing from

If the American People ever allow the banks to control the issuance of their currency, the banks and corporations which would grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. Thomas Jefferson

the US currency and the present currency being mere paper in its intrinsic value. This Act provided the pathway for printing endless currency notes, while the FED bankers knew that all the money would land back with them with enormous lending to the government. And unsurprisingly so, now US government owes trillions of dollars in debt to the Federal Reserve itself. Alan Greenspan himself commented: “In absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value… Gold stands as the protector of property rights…” (Greenspan)5 It is quite clear that the above mentioned system has lead to and would lead to abysmal concentration of power and excesses on account of it which can drive the whole world in a state of jeopardy. And this is exactly what they aim by pushing all the nations of world towards neo liberal fronts, pushing them to go for excessive financial liberalization so that these speculators can have their ugly games therein and drive the resources as they want to. This is Financial Imperialism. The East Asian Crisis was an ensuing result of this speculative onslaught, where these speculators took over billions of dollars worth of assets as lowly prices and demanded billions of dollars of subsidies. We would discuss more and in depth on how secure India is from this global onslaught in pages to come.

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Alan Greenspan, Gold and Economic Freedom

Foster quoted Baran and Sweezy's response to an "irrational system." What's needed is "our moral obligation to (fight) against an evil and destructive system which maims, oppresses, and dishonors those who live under it, and which threatens devastation and death to millions....around the globe." Today, the threat is real, growing, and becoming greater than most anyone imagined, remembers, or has any sure way to contain.

November 4 election night. It was a happening at Chicago's Grant Park. Like New Year's eve in Times Square. Expectant many tens of thousands assembled for a huge victory rally. Office buildings were emptied to let them come. They arrived early. Awaiting official word that their man won. Eager to greet him. The new president-elect. A change of the guard. A new day. At around 10PM, the crowd erupted when on giant TV screens CNN called it for Obama. "Yes we can" people chanted. It was mass euphoria. At a time of deepening financial duress. The worst in many decades. Hitting Chicagoans hard like many others. The nation at war on two fronts as well. A possible new one with Iran, and a new Cold War with Russia in the wings. Out of sight and mind as Chicago threw a party and brought the whole city to a halt. Until after midnight when crowds began dispersing All night electricity filled the air. "Finally we have someone who will change the world," said a woman. "He'll put the right people in the right jobs," said another. "He wants to make a difference in our country," one more. Not a hint of negativity in sight. Not tonight at least. Tomorrow will be soon enough. Mark January 20 as the day it arrives. Inauguration day. In the meantime, party on. In less than three months, the age of George Bush will end and a new Obama one will begin. Will it be different or more of the same? Will the new president be less hawkish? Less supportive of massive Wall Street bailouts? Socialism for the rich and the hindmost for the rest? Less controlled by monied interests? More committed to public need? Main Street over Wall Street? More eager to end foreign wars? More dedicated to a new course? Reversing his predecessor's toxic legacy? Governing responsibly for the first time in decades? Maybe ever, but at least since the New Deal? Is anything close to that possible? Think so? Think again. Comparing Obama to FDR and expecting another New Deal is ludicrous. Yet with every new president hope springs eternal. Candidates promise change (or at least suggest it) and people buy it. A new course. Racial harmony. Peace and prosperity. Populist reform and a radical shift away from the Bush administration's toxic extremism. A deep breath please for a reality check. A wake-up call. A cold shower. Stephen Lendman, The Severity of Today’s Crisis

India and the Contemporary Financial Crisis

Part II – India Under Lens

THE BACKGROUND: In economics we always see a contradiction to any established theory one recent case is that of crisis. The old saying that “united we stand” no longer seems to hold true. In fact what corresponds to the present crisis is the saying that “united we fall”. The second half of the 20 th century saw a massive rise in the global adrenaline level make them crazy to expand the realm of globalization. But it cannot be denied that there is always a limit to everything and the world seem to have overexerted itself as it is now showing sign of nervous breakdown because the global spinal cord of capitalism is under threat of crumbling into pieces but there is no shortage of surgeons who with their own limited expertise is trying to join those pieces or even substituting with a titanium one to make it even more indestructible. But the success of the surgery depends on many factors. When trying to integrate the world into a single entity it undoubtedly make every make every participant crisis prone. When the brain stops functioning properly rest of the body also goes hay ware. India being a signatory of WTO no doubt cannot be ousted from the global development and this is why the earlier claims of the so called learned Indian politician or policymakers so genuinely wrong in claiming that India has the requisite antibodies to foil the global turmoil. But alas this is a new disease for which no antibodies or vaccination has developed. And the ability to develop an antidote at the earliest holds the future of capitalism which sometime back was the voice of every right wing learned people. With regard to India the first sign of infection became apparent when the downfall of the Wall Street shifted the bullish SENSEX into a bear run toppling the whopping 20000 mark to below 10000 mark in a matter of few days But the irony was that the BJP who itself is a pioneer of capitalism thought that they could use this incident as a political slogan to topple the Sheila dixit government but they were paid in the same coin for making hole s in their own plates. The left were not behind in taking credit of failing the proposal of full capital account convertibility and thus saving the Indian financial system from being infected. Kudos to them. But very soon they are going to lose their credibility because even if they themselves come to power in this election they have to open up the capital account under the agreement with the World Bank.

Crisis and the Changing Global Perception The present crisis have defragmented the whole globe into three groups: one the pessimist like Warren Buffet who claims that the present crisis won’t be solved in the next 77 years on the other extreme are the overoptimistic group comprising of the right wing economist like Montek Ahluwalia for whom this crisis is a short term holiday from the general course of capitalism. The third and the clever ones are those guided by the Buddha’s preaching of middle path thus claiming that this crisis is deep enough and thus will take a few years to bounce the economy back on the fast track. Well nobody is right and nobody is wrong in making such claims. Because unlike the great depression of 1930s or those of 70s this one is a hell lot more complicated because it is no longer limited to the political boundaries of the so called industrialised countries and also this is a cumulative effect of the way the global economy was functioning behind the veil of global integration. As a matter of fact in 70s the capitalist nations in order to sell their overproduced commodities introduced globalisation and thus complete the capital circuit of M-C-M’. But soon when every nation stared doing that the world as a whole faces the realisation problem as the income was not enough to purchase all the produced commodities. But the so called capitalist hunger came up with two fantastic innovations which in the form of remedy was nothing but a sort of putting the world on arsenic poisoning which would slowly cripple the world. They were the credit system and the stock market. The credit system was a boon for the materialist who seems to be inspired by the saying of Keynes that “in long run we are all dead” went for spending sprees which further push the global system into a crisis situation. The bindas life of the west was further catalysed by the development of stock market which changed the organising principle of capitalism from M-C-M’ to M-S-M’ i.e. money capital going into stock market and instantly getting converted into more money at the stroke of a computer. What a mess people just don’t seem to learn from the old wisdom that “hard work always give sweet return”. But the saying that “as you sow so shall you reap” because the windfall gains of the recently claimed “greedy” stock market investor now find their million dollars gone just at the blink of their eyes. Where have all their savings gone. Nobody knows. Seeing the scenario Marx who till now was thought of as an obsolete mindless philosopher became a hero within days even for those who few days back working under the corporate firms earning millions of dollars, living a kings life came to crowded and troubled streets from the wall street. Also Keynes who had recently lost its significance became a messiah as many economists turn themselves into Keynesian. But history says that different saviour comes at different circumstances and as for the present crisis who will be the “ONE” nobody knows we can just wait and watch.

RATIONALE FOR THE PERCEPTION THAT INDIA IS INSULATED FROM THE FINANCIAL CRISIS: In this regard left raises the first voice that because of their efforts the Tarrapore committee recommendations of making capital account fully convertible wasn’t materialised. Sounds convincing but it is heartening to know that this insulation from the external financial shock will be short lived because anyway India has to open up its capital account by 2011 when the agreement with World Bank. Some economist even resorted to the cultural dichotomy between the east and the west to explain India’s insulation. They claims that the youth of the capitalist countries are more materialistic and in order to satisfy their internal urge of leading a luxurious life go for purchasing spree which as mentioned above has its own problem . On the other hand the Indian counterparts woven by families ties usually live under the umbrella of their parents and thus very least possibility of getting access to the credit card system. This restricted spending over income to a large extent. It is indeed true that our financial integration with rest of the world is very limited. This cannot be denied and thus is another reason why people see India on the safer side. But with regard to trade despite being one of the least open economies of Asia has a trade volume which accounts to 40% of GDP. Thus whatever be the justification for the India’s isolation from this crisis it all crumbles down when analysed properly implying that India’s isolation is merely a notion of the over optimistic brigades.

INDICATORS OF THE RECESSIONARY IMPACT OF THE FINANCIAL CRISIS IN INDIA As early as April 2008 the eyebrows were already raised about the US financial crisis transcending into India but at that time we were preoccupied with internal inflation management which made us neglect the issue. But there is no doubt that the so claimed strong fundamentals failed to keep India aloof from the global turmoil. The pay cuts and the firing out from job means the adventurous and the fun loving westerner will cut down on their travel expenses. True indeed when the Wall Street crumbled and the crisis became undeniable India observed a massive fall in the number of tourist visiting India. This already shaken tourism industry was further traumatised by the Mumbai terror attack which saw more than 30% of the tourist cancelling the reservations this impacted the hotels and the aviation industry the most. This has many negative multiplier effects because many tourist spots in India supports a large locally concentrated informal industries. Thus there was a growing unemployment in the informal sector. This also impacts the transport sector.

What most firms in the west adopted was an easy way to cut operating cost. The vibrant young global population who till now lured by the huge pay packages offered by the private firms criticised public sector on the ground of efficiency and adored the hire and fire rule as the way to increase efficiency. But this crisis proved such perception to be one of their greatest mistakes because companies without considering any moral ground started firing staffs. The kick out employees now must be envying their public sector counterparts. The massive firing of staff severely hurt the BPO industries in India as it is no longer hiring any new staff and a shocking incident was that of Noida where the CEO was killed by the mob of fired staff. Another sector very badly hurt is that of export because even the depreciating rupee seems to be inadequate to drive up the external demand. Rather than reflecting a trade surplus our balance of trade is continuing to show an ever expanding trade deficit and it had amounted to $60 billion in H1 2008-09.hitherto the rising commodity prices and strong demand from emerging market and oil producers which was bolstering economic growth is no longer there. And despite being one of the least open economy in asia has external trade which constitute 40 % of the GDP. Another indicator of the impact of crisis is the massive pull out of FII in billions of dollars fuelling the depreciation of rupee and RBI in an attempt to check the decline has drawn down its dollar reserves by almost $100 billion in the last few months. A very recent shock that defied all earlier predictions was the low fig of the GDP growth rate in the third quarter which was pegged at 5.3%.this was fuelled by the poor performance of industry down to around 3% from the mammoth 9% a year back. Also the optimism of a good monsoon crashed as the agricultural growth rate was down to around 2% against the expected 4% growth. Manufacturing, services and electricity generation etc also nosedived.

BUY AMERICA POLICY: The largest capitalist nation of the world who with its muscle power has always been trying to convert the world into a capitalist society where there will free trade and capital flows suddenly seems to be backing out from its own stance. Instead of trying to solve the current crisis by leading from the front as it has always done whenever it smelt any benefits coming by, it itself have resorted to the policies which it has till now vehemently criticised and even term as “beggar thy neighbour policy”. What an irony all the promises of a better world under president Obama now seems a farce. Being a democratic candidate we shouldn’t be surprised that he is taking up such action as the “Buy America Policy”. What a patriot. It might seem patriotic to the uncompetitive Americans who rather than competing fairly with the talent pool of the East resort to such double standards. But mark it that he will never be forgiven by the next American generation who will very soon realize that all he did was postpone the real burden to the coming generations. The next few American generation will no doubt

hold strong grudge against their processors as the war against terrorism and those against Iraq already runs into trillions of debt which will be collected from the coming generations along with an interest. The buy America policy will only aggravate it. It will be interesting to see how the WTO will respond to such policy which destroys the very essence of free trade. The stimulus package of $800 billion under “Buy American” clause imposes restriction on the use of nonAmerican material in all the public works programmes that will be funded by the stimulus package. In addition, firms and banks receiving rescue funds from the govt. may face restrictions on hiring foreign workers. Similar policies are also pursued by European government. But such protectionism will not trigger economic growth nor will it bring an end to this recession. It will only increase cost of production and result in inefficient allocation of resources. In the short run, it will also trigger retaliations from trading nations. In long run this will reduce global competitiveness of local manufacturers and the efficient and competent industries or companies like Microsoft, Intel, and Boeing etc will be on the losing end if India, China and other trading partner imposes tariff son the goods produced by these companies. However under the 1995 WTO agreement on govt. procurement US will allow imports from the 38 nations who are its signatory but its major trading partner like India, China and Brazil will be subject to restriction as they haven’t sign the agreement. So Obama now has to work on separate agreement with these countries. It will be interesting to see the development of the G20 meeting which will be held soon as India is already committed towards foiling any protectionist policies that other countries might adopt.

WHY THE SERVICE SECTOR CAN’T SAVE INDIA FROM RECESSION: Few months back the midterm review of the economy claimed that India has an exceptionally large service sector which would suffer the least in a downswing and thus prove India to be more resilient than other nations. But in reality that’s not the case because as the world development indicators 2007 of the World Bank shows that India’s services share of 53% of the GDP makes it a services laggard even in South Asia(66%). The false perceptions with regard to this sector comes from fact that the IT services has made India world famous for computer software, BPO and KPO and its export have grown from almost nothing in 2007 to $40 billion in 2008. But trade hardly figure in national accounts. The standard breakup of services in CSO accounts list four main categories: trade and hotels; transport and communication; finance, real estate and housing; and community services. Presumably various IT services are distributed within these categories. In the 10th Plan period the first three categories have grown faster than the GDP, showing that services dynamism is very important for India but this is a common global observation. Of the above mention four categories trade and hotel won’t be resilient in recession. Transport and services represent a mix picture of poor performance in transport but huge growth in telecom. Finance

and real estate also shows a mix picture but the community services will be boosted by the full implementation of the 6th pay commission. Thus our services sector which is below the global standards can’t insulate us from the global slowdown.

HARMFUL EFFECTS OF THE POPULIST POLICIES The year 2009 will be a landmark year for many reasons. After the world was wrapped in the sorrows of crisis the victory of Obama gave some hope. Since assuming office in January he has hardly undertaken any remarkable steps to push the global economy out of the slumps rather his policies has faced many criticism from round the globe. This year more than 60 nations constituting around 4 billion will be electing their new govt. India is one among them where around 700 million will cast their votes. As the election is drawing near the political turmoil has already started. Every day we find the politicians changing the allies and war of words has already turned nasty. And given the declaration that a mammoth amount of Rs 500000 crore will be spent in this election many thinks that this amount will in some way or the other act as a stimulus package and thus the multiplier effect it will generate will act as factor which will ensure that the India’s GDP growth rate doesn’t fall below 7%. But it is worth mentioning here that this amount will hardly be spent for productive purposes. As Mayawati one of the strongest contenders for the post of PM has already appointed people to look after liquor distribution which has always been the political resort to lure votes from the alcoholics. A Keynesian might argue that this will lead to production will lead to generation of income and thus a whole chain of multiplier effect. But I would rather like to suggest that crisis is a time when a economy can restructure itself and emerge out strongly so instead of channelling such huge amount on a product which comes with many social problems like the case of moral policing I would suggest channelling it to infrastructure building and the twin sector of health and education which have a whole gamut of positive externalities and large multiplier effect and which will ensure a better society for tomorrow.

THE TWIN PROBLEMS OF DEFLATION AND DEPRECIATION: What India is currently facing is the twin problems of a plausible deflation and a never ending depreciation. This seems to be a mockery of the stability of the stability of the global economy. A year back India was facing a skyrocketing inflation crossing the double digit mark and touching a mouth gaping 12%. That was the time when government was trying desperately to control it but failed to do so as it was the case of imported inflation and domestic measures were not strong enough to tame it. This was the time when the saffron brigades had come on the streets to condemn the inability of the ruling government. But today the situation is entirely reversed. The last week WPI represented a minuscule inflation rate of 0.44%. This has triggered the fear of a possible deflation. If not checked it will mean further fuelling the downswing of the GDP growth rate which has already came below the 6%

mark. But the irony is that the food prices have not come down, it is still high implying that the hard times of the poor are now going to still harder. A possible solution will be discussed later on. Similar is the case with our exchange market. Two years back when the rupee was appreciating and touched the high of Rs.39 per dollar the exporters were concerned about losing competitiveness in the global market. Now the tide has turned and the exchange rate has breached the 50 mark and is currently standing at Rs.51 per dollar. But the financial crisis stole the would have been smiles from the exporters since the global demand is so weak that despite having a competitive advantage doesn’t have any corresponding global demand. The RBI’s effort to check this downswing hasn’t paid off despite drawing down hundreds of billions of foreign reserves. Hope that the situation will become better in the coming days.

AUTOMOBILE AND TELECOM SECTORS THE TWIN PATHBREAKERS: When the economy is desperately trying to restrict the downward swing the twin industry of automobiles and telecom seems to be riding out of the storm hardly unscratched. Recently the India’s telecom sector has crossed the landmark of over 200 millions mobile users. Although given the population of over 1000 millions the teledensity seems to be far behind the global average but in absolute number of users it is next only to China. And is no doubt the fastest growing in the world. Over the last few months since depression has hit the market the monthly addition of mobile users is over 1 million which is quite incredible. And depression has fail to deter some determined player from carrying out expansion program for example the arrival of Aircel in Delhi. This sector will soon get further push ups when the long awaited 3G spectrum will be available for mass use. Tomorrow the much awaited first people car of India – NANO- will hit the Indian roads for the first time. This needs a special mentioning in the context of crisis. Because to ride out of the depression technological innovation, creation of new product, and creation of the new market plays a very crucial roles and NANO is a conglomerate of all these features. This has created massive employment opportunities during this bad time as TATA has opened up exclusive stores and servicing centres in the rural and suburban regions. Also the focus of many automobiles company has shifted to developing low cost model. The story doesn’t end here TATA has a whole gamut of new model which will be hitting the Indian road later this year and early next year. This sounds crazy at this time but Indian market is a special case as reflected by the increasing automobile sales over the last few months.

THE POST CRISIS WORLD OF BRICs: An alternative power bloc that is gaining popularity recently is popularly called BRICs. This group comprises of the “trillion plus” emerging economies of China, India, Brazil, Russia, Mexico and Korea. The forecasted infrastructure invested in these markets for 2008-17 is pegged at $21.7 trillion. Although all these nations are facing problems of different forms some with liquidity problems, some with

depreciation and so on. But all these nations have accumulated huge foreign exchange reserves beside being supported by Federal Reserve which has committed USD50 billion to each of these nations in currency swap agreement. There is no doubt that when the world economy gradually recovers from this crisis the new expansion cycle will be dominated by the BRIC economies. India and Brazil will continue to benefit from the “demographic dividend” with a growing working age population. Russia will be consolidating its influence in regional and world affairs as a global supplier of energy and military technology. Brazil in addition to being one of the largest commodity producers is also becoming a major competitor in high end technologies, with a competitive edge in clean techs and renewable energies.

Way Ahead This economic crisis establishes new rules, throw up new opportunities and redistributive power. In order to become the new ruler of the new economy we need to grab those opportunities. In the aftermath of this crisis it is undeniable that the markets will shift towards the east and big emerging economies like India and China will bear the burden of keeping the world economy moving. A new trend will be that of the shifting battlefield for talents in which India has a strong lead but the outmoded education system of India will imply a situation of excess demand. For the focus should be more in imparting industry relevant training. Taking account of the already battered ecosystem the target of every company will be to go Green. This crisis also calls for a new industry structures characterised by flexibility, cost effectiveness and development of futuristic tools. The focus should be given to rural India which is doing well because of the good harvest, high MSP, expanding employment guarantee programs and rising minimum wages in many states. This growth momentum needs to be maintained. We can also adopt the Mexican idea of “conditional cash transfers" to poor households which enables and encourages those household to invest in their children’s health, nutrition and health. Over the last few months we have seen govt. coming up with various stimulus packages. In this regard we have seen RBI following an increasingly easier monetary policy. But such operations are being done through money market measures such as repo and cash reserve ratio, which are direct, short term measures of intervening as compared to the bank rate which impacts the economy through a more indirect transmission system. Thus in the current circumstances a prudent and judicious mix of expansionary monetary policy with a fiscal policy where public investment provide a strong complementarities to the private sector would be most effective. As mentioned earlier the resilience to this recession can’t be provided by the service sector rather it is the agricultural sector that can act as a saviour. No doubt it was performing very well in the past few years showing an average growth of around 4% but this year it has come down to 2%. This signals bad days ahead. This is also one reason why the WPI besides being down to the lowest of 0.44% triggering fear of deflation shows rising food prices. Unlike other orthodox suggestions here I would like to give my own views. This situation can be effectively dealt with by shifting the focus of agricultural supply toward the north-eastern region of our country. This region has massive agricultural and horticulture potential and the high productivity means that the potential supply can bring down the food index spiralling down. This has many associated benefits. This will provide markets for the agricultural products of this region thus generating huge employment opportunities. Also this will call for better transportation

facilities which will again generate employment and ensure efficiency. And most importantly it will help in reducing political instability and which again will reduce the mammoth military expenditure of this region which can be diverted for productive purposes.