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Economic Highlights
Global Economy Woes
SAY NO TO IMF, WORLD BANK PRESCRIPTION
By Shivaji Sarkar
New Delhi, August 14, 2008
Global integration is exposing India to global problems. A
decade back India was insulated from the crash that had
engulfed the Southeast Asian tigers, in its neighbourhood. Now
developments in far off US are hitting the Indian economy! It
is slowing down.
The slowdown, almost recession-like situation, in the US and
some parts of Western Europe has Indians packing back home.
This will further pressurize the economic outlook as well as
the job market. It is already showing signs of cracks in the
real estate, manufacturing, exports and all other sectors.
Even the Bombay Stock Exchange share is losing its sheen.
In its earlier rating of the Indian economy, the international
rating agency Moody’s Investor Service has only supported the
contention. It says that risks confronting the Indian economy
have grown amidst political uncertainties, higher Government
borrowings and rising prices. It has warned that India’s
sovereign ratings could be lowered from the current “stable”
outlook. In the late 90s, the Asian Tigers ratings too had
been lowered. However, oil prices were not as volatile then.
Earlier, rating agency Fitch had lowered rating outlook to
negative from stable. Standard & Poor (S&P) has also issued a
stern warning. The agencies have said there are pressures to
India’s external accounts due to the risk of fiscal
spillovers. Such spillovers, if huge, could weaken the gap
between foreign currency and the local currency ratings – the
rupee may further lose its strength.
Moody’s says if the fiscal policy response remained inadequate
amidst heightened external shocks or results in inflation,
then ratings pressure for change in India’s outlook to
negative would increase. A rate downgrade, what is known as
back to speculative grade, would divert international
investment. This would mean a further crunch for
infrastructure and all other sectors. Investments are the
cheapest funding. If these dry up, borrowings are bound to
increase.
The Reserve Bank has stated that the external debt increased
by $ 51.5 billion, 30.4 per cent, to $222 billion at end March
2008. Indian companies are not getting investment so they have
resorted to external commercial borrowings at higher rates.
Conversely this has made financing expensive and would lead
to a serious situation in the days to come, particularly as
the sales are also on the downslide owing to credit squeeze
and high interest rates.
This is an international – IMF, World Bank -- prescription to
the RBI for soaking up the extra money in the money market. It
is having devastating results on the entire economy. The RBI
needs to think of de-linking and devising a more realistic
India-centric economic policy of low-interest regime. Its
international, rather West-looking, policies would subisidise
the western economy alright but would, in fact has started
creating havoc for the domestic players. The so-called
anti-inflation steps are adding to the miseries, not only of
the average Indian but so also of the large corporates.
The Mall boom, again with public money, is apparently busting.
The occupancy is poor. The footfalls, buyers, are falling.
“The dynamics of the mall segment have changed in the last few
years, as there is an oversupply of retail space. With a fall
in footfalls, the retailers are finding it tough to drive in
the customers to their malls”, says Anuj Puri, Chairman, Jones
Lang La Salle Meghraj (JLLM).
The World Bank in the late 90s had diagnosed the Asian Tiger
crisis to large real estate constructions and mall boom. It
had also hinted at a possible nexus between commercial bank
officials and developers. India is seemingly into a similar
situation.
With most malls offering lease terms of six to nine years and
retailers being locked in for two to three years with high
initial investments and rental costs, the operation break-even
has now been overstretched. It means sustaining losses for a
longer period with little assurance of a return, especially
for small retailers. This may mean the closure of many retail
and back-chain production units.
The job-chain is also getting affected. High-end jobs are
drying up. Even the low-end ones are difficult to get. The
ICICI, has during the past few months sacked over 1,000
Executives “for poor performance”, euphemism being used to
justify the company action. Now even retailers like Reliance
Retail are resorting to “staff rationalization”. India Bulls
and Future Group have fired Executives. According to retail
industry experts, it is for the first time that the middle and
senior-level Executives are being laid off!
Recal, that the Asian Tigers also resorted to large job cuts
and sackings when they faced the crisis a decade back. Much of
the so–called boom and subsequent bust - in Southeast Asia had
come with the opening of the market to global players.
Interestingly, mutual funds are supposed to be comparatively
insulated from volatility. Of late, assets under management (AUM)
have dipped-- by about six per cent. The top fund house,
Reliance Mutual Fund was hit the most with decline in AUMs
over Rs 6,000 crore. This is a result of the downturn in the
stock market leading to erosion in the value of mutual fund
units. This apart, high interest rates have prevented banks
and corporates to park their surplus cash in income schemes
leading to withdrawals of funds, explain fund managers.
Instability in the market prevents foreign institutional
investors as well.
Clearly, the outlook is not bright. Global integration has
made it possible to own up liabilities of other countries.
Global players come when the going is smooth. When it is
tough, the domestic players take the battering. The most
sought after level-playing field eludes the small and big
domestic companies in all sectors.
Thus there is need for a thorough policy review. Globalisation
cannot and should not be for the loss to its indigenous people
so that global predators can thrive. In our case, it has
happened in all sectors of the economy. The RBI, finance,
commerce and industry ministries need to reformulate the
policies not for the sake of inviting the so-called FDI, which
according to the RBI has raised India’s external liabilities
several fold.
The Government needs to create policies where financing is
low-cost. This is the sine qua non for putting the economy
back on rail. Soaking money out of the system, as suggested by
Economic Advisory Chairman C Rangarajan, former RBI governor,
would further aggravate the disease. He has brought down
growth projection to 7.5 per cent.
The country needs to upgrade its growth prospects. Lower
financing at high costs, as has been the norm in this country
for decades, would only retard it. India needs to evolve a
growth and financing pattern that is different from the IMF
and World Bank prescription. Unless this is done, the
prospects would remain dismal. Clearly, the global dip has
caused a most difficult situation at home.--INFA
(Copyright India News & Feature Alliance)
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