Crisis on Wall Street and India

Notwithstanding the soothing words of the Indian Finance Minister, P. Chidambaram, the Indian economy is in for a great deal of trouble. Looking back at the Great Depression of 1929-33 when the Indian economy was not so much integrated with the world economy as it is now, India’s rural population suffered in an unprecedented manner. During those days very few people in the villages of Bihar and UP could tell you about America and its geographical location. Yet, the slump in agricultural prices led to the failure on the part of peasantry to discharge its rent obligations, resulting in zamindars in Bihar and talukdars in Awadh foreclosing its landholdings. Powerful peasant movements, led by Swami Sahajanand in Bihar and by Baba Ramchandra in Awadh, forced the British Government to concede the demands of peasants. One may recall that Nehru was actively involved in the Awadh peasants’ struggle.

This time, the situation is radically different. The Indian economy is largely integrated with the world economy, thanks to the acceptance and implementation of the ten points of the Washington Consensus. Almost two decades ago, when the Narasimha Rao Government came to power India officially consigned the Nehruvian model of economic development to the garbage and there appeared experts, inspired by the Fund-Bank thinking, charging Nehru for ruining the prospects of India becoming a superpower long ago and leading India onto the path of the “Hindu rate of growth†. The ten points of the Washington Consensus were thought to be a panacea opening a new vista for the country. India was advised to liberalise, privatise and globalise. Thus, the doors and windows of the economy were kept fully ajar so that foreign capital and technology could come in without any hindrance to set up production facilities and make the capital markets buoyant. India was advised to cater to the foreign markets rather than the domestic one. Nehru’s mantra that India must go ahead producing largely on the basis of domestic capital, domestic labour and domestic resources for the domestic market in order to create maximum incomes and employment opportunities for Indians was discarded. The leakage of, what economists call, multiplier effect was to be prevented. This, along with the aim of removing regional imbalances and income inequalities, was to pave the way to national integration and social unity, preventing the emergence of all kinds of secessionist and disruptionist forces. Now, look around and you find a big resurgence of these forces!

The increased frequency of farmers’ suicides, communal riots, regional and linguistic chauvinism, Naxal movement gaining strength, and organised criminal gangs roaming around are, to a large extent, due to the new model of economic development tied to globalisation, based on the Washington Consensus.

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WITH the turmoil on the Wall Street, leading to the collapse of the 158-year old the Lehman Brothers and the Wilson-era Merrill Lynch, and the AIG being paralysed, and the frantic efforts of the Bush Administration to stop panic from spreading coming to nought, sooner or later the impact will be felt all around the globe. This time no country will escape while during the Great Depression the Soviet Union remained immune. The impact has been gathering strength ever since the sub-prime crisis, leading to insurmountable impediments in the way of the survival of Bear Stearns, JP Morgan, Chase & Co., Fannie Mae and Freddie Mac and the state rushing in to rescue them.

It is surprising that the likes of the Kaushik Basus and the Raghuram Rajans, venerable professors at US universities, have suddenly forgotten that this will lead to a ‘moral hazard’. These people were till the other day angry with the UPA Government for rural loan waivers and guaranteeing jobs to the rural poor because these schemes were going to destroy fiscal discipline by encouraging moral hazard.

The crisis is going to shatter the dreams of the educated young in India. All of a sudden job prospects have become bleak. The Economic Times (September 20) has reported that the dreams of a great future, global business travel and meetings with top honchos have turned into a nightmare. As many as 2500 employees of Lehman Brothers’ India unit and around 2.3 million young and energetic people working in India’s information technology and BPO are to lose their lucrative jobs. In India, around 60 per cent of the companies operating in the IT-BPO sector have been working for American financial corporations like Goldman Sachs, Washington Mutual, Citigroup, Bank of America, Morgan Stanley and the Lehman Brothers. Tata Consultancy Services and Satyam Computers have been working for the Merrill Lynch, and Wipro has a number of American corporations as its clients that are bruised by the present collapse. It is anybody’s guess that layoffs are certain to take place in Bangalore, Hyderabad, Chennai, Gurgaon, Noida, etc.

It is reported that the hiring outlook for India for the first quarter (January-March) of 2009 is going to dip by 23 percentage points for the finance and insurance sectors and for the information technology sector it will go down by nine percentage points. Multinational companies are likely to axe five-to-eight thousand jobs in the coming months in their call centres and related activities. Hewlett-Packard, that manufactures computers, printers, cartridges etc., is to reduce the size of its staff by around 25,000 all over the world. India too is going to lose some hundreds of well-paying jobs.

This is certainly going to bring gloom to the IIMs and IITs where the big corporations have been rushing every year to lure the bright ones with annual pay packages running up to two million rupees besides attractive perks. Frustration, depression and so on are sure to follow. In quite a number of cases parents borrow and even mortgage their immovable assets to raise funds to finance their wards’ studies. How will they discharge their obligations?

As many as 38 per cent of the Indian companies will be ousted from the billionaire club. The falling exchange value of the rupee vis-à-vis the dollar and the downward trend in the bourses have reduced the number of companies with market capitalisation exceeding a billion dollars to 139 from 227. Whatever the experts, daily paraded by the electronic media, may say, the fact remains that FIIs have been withdrawing their funds from Indian bourse. This trend will continue in the near future. This will obviously strengthen the bearish mood and Indian investors too will quit and go over to the bullion market and real estate where the prices will depress.

The malls, the PVRs and the producers of luxury goods like big cars, fancy clothes and shoes, plasma television sets, fashion magazines, page three of metropolitan dailies and so on too will feel the impact sooner than later in the form of declining or stagnating demands. And lay offs will be witnessed there. In other words, the contagion will be very much in evidence. Air travels will further decline and so will be the occupancy rates in five star hotels.

The Economic Times (September 16) has reported: “The crisis on the Wall Street would hit the fund-raising plans of India Inc. hard.†The Tata Motors have already cancelled the issue of preference shares to the tune of Rs 30,000 million. This indicates that many other Indian firms are going to shelve their plans of raising capital on the Wall Street. The Economic Times goes on to add: “Instead of capital inflow into the country, there will be higher outflow of funds from the country of $ 3-3.5 bn in the rest of the calendar year.†During 2007, there was an outflow of $ 7 bn from the equity market.

It goes on to add: “Even at international debt markets, the rates have gone up by 200 to 300 basis points in the past one year and is expected to go up further…. No wonder, the managers of Hindalco and Tata Motors’ rights issues are a nervous lot.â€

It is high time that there is a serious review of the strategy of development pursued by India since the early 1990s.

The author, a well-known economist, used to teach Economics in Kirorimal College, University of Delhi before his retirement a few years ago. He can contacted at e-mail: gmishra@girishmishra.com