Global Financial Crisis and India

Jan 10, 2011

Of late I have been struggling with my so called 'humour articles' and have begun to think twice before embarking on writing about my fictional Eddie uncle and his good intentions. Of the three comments I got, two were from my friends poking fun of me and the plump girl. Well I am free again and now that I have realized what my undoing is, let me change my baseless topics to some concrete facts and write something about what I have studied for the past year and half amidst numerous sleepless nights, loads of tea, teeth shattering cold and loss of a huge chunk of hair from my head, trying to get through my masters.

Please don’t stop reading just because the first paragraph was full of crap. According to me, every person should know what went wrong in the financial system of the world and how our is country doing at these troubled times. To be very frank, many of us don’t know what exactly happened, what is actually happening and what is in store for the future. This may be a boring article, but I will try my best to make it funny, even though it is not.

What actually happened

In simple terms global financial crisis, was a man-made bubble which burst, like all bubbles. Isn’t it a known fact from physics (Not sure whether it's physics or chemistry) that all bubbles burst at some point or the other? In the USA, where all the trouble began, government backed banks started lending loans to people at very low interest rates, to buy houses and riding on this wave, house prices began soaring up.

Even people with lower income were given loans as the banks were given an assurance by the US federal government that their returns are safe. This assurance made banks greedy and more and more banks began giving out loans. There may be politically driven vote bank motive behind this move as the fed government wanted people to realize their “AMERICAN DREAM” of owning a house in Mainland America.

If I remember quite well, every private bank in India repeatedly calls people (I don t know where they get our numbers from) asking to take loans and in contrast nationalized banks hardly think of loans as their mainstream business, they are bothered only about big fat deposits coming into their banks. This may be a good reason why our public banking system has withered the storm, but what about development? Our nationalized banks have a thousand rules to pass a loan, even for a BICYCLE.

Anyway, back to USA, these mortgages were bundled into securities by the banks and sold to China, Ireland, Germany and many other countries. So far so good. But gradually interest rates were increased by the federal bank in 2006; people could not pay back their loans as the rates were high. An obvious effect of all these was house rates going falling steeply which in turn led to foreign investors thinking twice before buying such mortgages, and financial institutions such as Lehmann Bros and AIG who had heavily invested in these crazy home loan securities were bankrupt as there were no buyers. Panic drove through all sectors and the whole system tumbled down like a pack of cards. If one thinks that the worst is over, we are wrong.

What is happening

Governments pumped money into the system which ran to the tunes of trillion dollars. Stimulus packages were given to every bank, every automaker to keep them afloat and yet executive bonuses were pretty hefty. If we look closely at the stimulus packages money, it is the taxpayer’s money which is going down the drain. People are encouraged to take another loan to repay their older loan, people are encouraged to spend money which is not theirs, which they should realize is not affordable.

To nullify the mortgage based bubble, the government has blown another bigger bubble. Every country is doing the same. Even I had thought that spending money now would be the best solution, but it seems to be a mid term solution, the final outcome is going to be a disaster. Political motives and corruption are also not helping to channelize the money to the right sectors. Countries have to go bankrupt in near future due to excessive debts; Experts have named the countries which are going to be bankrupt as PIGS (Portugal, Ireland ,Greece and Spain) just as Goldman Sachs had named emerging economies as BRIC (Brazil, Russia, India and China)

Where does India stand amongst all this trouble?

Well quite frankly, we are doing great compared to other countries. As our economy is mainly domestically driven rather than export driven like Chinese economy, we are better insulated to the storm. The Indian mentality of saving rather than investing has also come in handy. It s like we have had a precautionary shot to overcome this meltdown.

In the early 1990’s when our economy was freed and was made attractive to foreign investment, care was taken to make it moderately export driven by leaving enough space for domestic markets and domestic players.

Agriculture and small scale industries are India’s main breadwinner for a rural family, and IT for an urban family. Around 65% of Indian population depends on agriculture for a living and its accounts for 22% of GDP, and Indian IT and BPO exports constitute 6 % of GDP. There are several other exports like fish, fish oil, ayurvedic medicines and many other secondary materials out of agriculture which drive our export market. Reports say that within the next 5 years India is going to take over from China as the manufacturing hub of the world. Nevertheless, we are hit by the global phenomenon and have to take measures to withstand it.

What should we do?

As responsible citizens of a huge democracy, first thing we can do is to pay taxes and not deprive of the government of their income. This is the right time to drive in some major rural development schemes and fill up the void inside. Distribution of wealth in India is very uneven and the rich are getting richer and the poor more poor (I mean the tax paid is not going in right directions for development work, half the money ends in our corrupt leader’s pockets).

The government has to bring out strict measures to oversee the implementation of some good schemes such as National Minimum Wages and the Rozgar Yojana. Helping farmers spend and cultivate more would be a solution, but again the extent of inflating the bubble has to be checked by the banks before lending out money to farmers. Agriculture sector can create a lot of jobs in India and the only thing which is hindering us is the lack of dignity in making agriculture a career. No father wants his son to be a farmer and vice versa and I do not know why this culture has dawned upon Indians off late.

The world is going to soon see one more financial crisis, as most of the trend analysts predict. We can withstand or even avoid it, if we act upon it soon. We as citizens of the world have to make our contribution by becoming aware of complex investments, government programmes, political situation and its effect on the economy. Even saving electricity and water might help in a small way. Now that we know there is going to be a downturn, it is up to us and the governments of the world to get some measures in place and sail us through the rough times smoothly.


Anil D'Souza - Archives:

By Anil D'Souza, Halealve
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Comment on this article

  • Anil Dsouza, Halealve/Cardiff

    Tue, Jan 18 2011

    There is one more documentary called OVERDOSE, which is also excellent.

  • Abraham Coutinho, Mundkur/Bombay

    Thu, Jan 13 2011

    Good article Anil. Keep writing. The Bubble emerged in USA economy and it had to burst.
    But in India the chance to emerge the Bubble is not allowed. There is no 100% housing loan. 20/30% should be your own. That is safety net.
    Our philosohy - Save, Do not borrow. Never die in debt. So,Domestic Saving went up. Highest in the world. Some live debt free, earn & keep for their generation also. Not like USA who spend all and live on Pension.

    Yes, the Good Govt. Policy saves nation. During V.P. Singh Govt.foreign countries were afraid to give us material without a Confirmed L/C. We were in problem. Financial instability. Dr. Manmohan as FM changed it. Liberalized economy and also sent strict warning to Indian Manufacturers that Govt. will not support them any more. They either should sink or sail by innovation, improving quality and facing competion. Also he liberized the economy - Advance Licence, EPCG, Spl. Economic Zones etc. It paid well. Our economy improved. And subsequent to that India was ready with more than 50% working population - Educated/qualified making the per unit end product cost cheap and competitive. Gone were the days, one had to wait for 3 years for cooking gas, 5 years of telephone, 10 years for Bajaj Scooter.
    Huge population puts strain on existing natural resources and it is not good. But what happened in the past Great Depression is that very population saved us from depression due to huge consumption while we had very little exports.

  • Ashwin, Bejai/Mangalore

    Wed, Jan 12 2011

    Dear Readers , i kindly request you all to get hold of a copy of Zeitgeist a documentary .
    its a true Eye opener .
    do watch both the parts .

  • John, Mangalore

    Wed, Jan 12 2011

    Good Article. To know what is really happening in the US and Global financial systems you must read

    The sheer manipulation of the market and currencies is mind boggling.

  • A.S.Mathew, U.S.A.

    Tue, Jan 11 2011

    Some of the economic pulse reading results are as follows.

    Some of the Indians say " I came to
    America with $ 3.00, and may have
    return without $ 3.00 and a free

    Atlanta Journal advertisement.
    "500 homes offered by the banks.
    $ 250000.00 to 500000.00 market
    price" In auction, we may get many'of them for 1/5 to 1/10 of the
    market price". People with ready-
    cash can get real estate for the asking price. The solid real
    estate has now turned as the
    unreal burden for everybody.

    The Governemnt-private debt
    combined is 45 trillion dollar,
    when this can be solved?

    Bank failures and bankruptcies
    are soaring, unemployment is not
    coming down because there is no
    jobs in the U.S. Around 20 million jobs (a mainly blue collar)
    have gone from the U.S. to China
    during the last 20 years.

    Now the economic predictions and
    projections are getting far hopeless the full recovery will
    start in 2015.

    The best tonic for the brain is
    simply not to read about the economic recovery, but watch the
    beautiful birds outside, because
    the Creator is providing for them
    in rain and sunshine. They had
    no sowing and reaping, no economic
    planning and predictions, no credit
    card or debt card, no housing
    evictions by the banks.

  • Max & Jessie Rasquinha, Mangalore/Houston, Texas

    Tue, Jan 11 2011

    Thank you, Mr. Anil D'Souza for your timely arrticle on Global financial crisis. Each and every one of us are interdependant with each other. Each country is interlinked with the other because that is the way the global monetary systems are built and managed.

    One country could be slightly stronger or better than the other but the entire world depends upon each other for our survival and growth. Leadership of each country watches the other so carefully so as to formulate our policies and philosophies in order to work together and grow with each other. The World Bank, the World Trade system and the United Nations body have lot to consider together in a global context. The Superpowers of the world have a greater responsibility to supervise and liaise with the developing countries so that the resources are shared and if necessary bartered with each other. Most of the developing countries are in the neo-colonial era and therefore they are so much relying on other nations for help and support. The global population is now fully conscious of the responsibilities rested upon each other so that our resources are equally shared thru all the conservative measures available and possible.

  • a.naik, mlore

    Mon, Jan 10 2011

    savings is old school mentality according to our neo class population but its the best way to save ourselves along with our country all our present gen is trying to compete with neighbours they rather think that they really need it or not consumerism is a failure (US),like total communism (USSR)...

  • Valerian Furtado , Mulky/Canada

    Mon, Jan 10 2011

    I have my own theory and according to that, the reason for the current mess in USA is whole sale outsourcing of jobs to India, China and Mexico. when local population dont have the jobs, how can they afford to pay for anything, it's true that loans were given for everyone, but if they had the jobs majority would have paid loans back.Now corporate America in the name of competitiveness has sent most of the jobs outside with variety of weird theories. Except for IT I don't know why they are outsouring. Infact that is the reason for all this mess. On the otherhand there is a bubble forming in India, see the house prices see the salaries of average people and then conclude yourself

  • Pearl Tauro, Mangalore

    Mon, Jan 10 2011

    Hey Anil

    A good article about the bubble burst!!!
    A must read for all students.

  • Donald, Padil - Dubai

    Mon, Jan 10 2011

    Good one Anil.

  • Judith L, Mumbai

    Mon, Jan 10 2011

    As per Economists, the bigger downturn will happen in the year 2030. If our Country, doesnot take precautionary steps, we will be largely hit by this recession.

  • Judith L, Mumbai

    Mon, Jan 10 2011

    Last but not the least it is mainly the saving nad tax paying mentality of middle class common man which has saved our Country from recession which has helped major banks and financial institution with sufficient reserves. Jai Ho Middle Class

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