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G20, Manmohan, and the 'only good news'

By Mohan Guruswamy
November 26, 2008 12:19 IST
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Prime Minister Dr Manmohan Singh has returned from Washington after attending the G-20 conference summoned by the lame duck US President George W Bush on November 15 to discuss the current economic crisis and possibly even find a way to halt the United States contagion from spreading any further.

As expected nothing significant has come out of it, yet our PM's friends in the media have been going gaga on his intellectual contribution to the deliberations and are making much of his having been given a speaking opportunity.

Typically they have also been touting as a sign of India's coming of age and place in the international pantheon.

The crisis is entirely one of American origin and a consequence of the prolonged mismanagement and under-management of both, the US economy and its financial system.

When Bill Clinton handed over to George Bush in 2001, he left him with a budget surplus and a robustly growing economy. Since then the US government's finances have deteriorated sharply because of its vengeful and senseless war on Iraq and another misadventure in Afghanistan. Both wars are without UN sanction and due to US's delusions of omnipotence.

So financially things ended up worse than before Clinton took over from the earlier Bush. This year the US had a budget deficit of about $455 billion.

The US has had a balance of trade deficit for decades now and this has grown to $847 billion in 2007, and still growing. Traditionally it has been quite simple for the US to bridge the ever widening gaps because the rest of the world constantly hungered for US securities.

China has almost $1 trillion in US securities and India too has over $120 billion. Consequently, the US had an external debt exceeding $12.5 trillion in 2007 and this is growing by $500 billion since 2003. If you add future outgoes to its citizens like Medicare, pensions, et cetera the USA has another $42 trillion due for payment.

The world was lending to the US

The irony is that the world, and even relatively poor countries like India, was lending to the US by buying US securities as a sound investment instead of the pyramiding scam it had actually become.

That India still sees it as a sound investment is amply reflected by the fact that there have been no withdrawals even when the rupee came under pressure due to the flight of FII (foreign institutional investors) dollars.

What now compounds this problem is that the US accounts for about 20 per cent of the gross world product (GWP) which is the sum of all national GDPs. So when the US sneezes many others catch a cold, which might even turn into pneumonia for some.

If it was some third world country that was caught in this situation it would have been taken into hand by the International Monetary Fund and the finances set right with all the attendant pains it would have entailed. If you didn't accept the IMF conditionalities you were threatened with a foreclosure and shut down, as happened to India in 1991.

This has happened to Brazil, Argentina and even Great Britain. Now you can't do that to the US of A. It practically owns the IMF. And there is no one among the G20 who has the gumption or even the clarity of vision to tell the Americans that it can't go on with spending and borrowing as usual, and if it doesn't set its house in order the rest will have to act.

Not only is the US the world's greatest debtor, most of its citizens are just as profligate borrowers. The credit card debt in the US is now in excess of $365 billion and of this $91 billion is considered as bad debt. This debt is bigger than most national debts of even good sized economies like India. This now threatens to be the next big blowback.

Two crises, morphing into one

The US crisis is two crises morphing into one. The economic crisis which has been festering for long, and the financial crisis which came to a boil a couple of months ago resulting in the failure of giants like AIG, Lehman Brothers, Merrill Lynch and Bear Stearns, etc.

The Chinese Prime Minister Wen Jiabao has succinctly described them as the crises in the real and fictitious economies. The largely unregulated US financial system began to tank when the bottom fell out of the US housing market. This was due to downward spiral brought about by oversupply of housing, high interest rates and poor creditworthiness of the borrowers.

This turned into a severe liquidity crisis for the commercial and investment banks with huge exposures to the housing markets. When the liquidity crisis hit, the reckless domestic lenders began to pull out their investments in emerging country share markets like India's. In the past few weeks, FIIs have pulled out over $8 billion from India causing the stock market to tank.

The rapid exit of FII funds caused a spike in the demand for dollars that caused the Indian rupee to devalue by as much as 20 per cent at one point. The hitherto high flying Sensex fell to below 8,000, less than half of what it was a few months ago.

Now the Sensex falling is not an economic crisis. But the rapidly devaluing rupee presents an economic challenge. Imports get expensive, stoking inflationary fires. Simultaneously export markets are contracting, thereby neutralising the main benefit accruing from devaluation.

True, world oil prices are also down but then even at this price level petrol, diesel, kerosene and cooking gas still need to be subsidised.

The real Indian economy which otherwise was as robust as it ever was in the last few years, is naturally beginning to feel the pinch and it has begun to hurt somewhat. Compounding this is the rapid contraction of consumer markets in the US, the world's most profligate spender whose humungous trade deficits we had all learned to love.

China, in particular, with its US trade surplus of over $300 billion is badly hit. In the past few weeks hundreds of Chinese exporting companies have shut shop throwing hundreds of thousands out of work.

India is a relatively small exporter of manufactured goods to the US and so will be less badly hit. Which is why we must be more optimistic than others?

It is not as if India will not hurt because of the current US crisis. No economy is really immune from it, unless you are North Korea. But no crisis is too small for our businessmen to take advantage off.

A few decades ago when warnings went out that an out-of-control US satellite's debris was to land anywhere over vast swathes of land in south India, there was some panic resulting in stoppage of construction work in some big project sites. This was used by many contractors to claim contingency funding from the government for losses suffered.

As can well be imagined much of these losses were fictitious and conniving state governments paid out crores (millions). The situation with domestic airlines has little to do with the US crisis. All our airlines were in trouble much before the US situation developed.

There was over capacity due to easy entry and all our airline bosses were losing sleep over the losses, except, of course, at Air India which is traditionally immune from profits and, by a foolish but broad consensus, immune from privatization.

Like the contractors, the purported owners of Jet Airways and Kingfisher tried to cadge a bailout from the government supported by an obliging civil aviation minister.

Now, Indian private sector wants bailout

Now we hear that Ratan Tata wants a huge fund of Rs 50,000 crore (Rs 500 billion) readied and made available to companies like Tata Steel and Tata Motors that paid out huge amounts for overseas assets like Corus Steel, and Jaguar and Land Rover.

The Tatas have made these acquisitions with generous loans from mostly foreign and some Indian banks. Suddenly the outlook has become bleak, both, for the companies acquired and some of the lenders.

A Damocles sword now hangs over Mr Tata. The banks may foreclose and future fund streams could close if his acquisitions now start hemorrhaging badly. So Mr Tata wants a bailout readied for him.

Few overseas acquisitions by Indian corporations have the requisite synergies useful for the Indian parent companies. It is understandable if an IT company like TCS wants to buy a distributor or developer of compatible software products, for that will help the Indian firm market their products and services better. But what do Corus and Jaguar do for their Indian parents?

They are good for our corporate and misplaced egos and do little for the national economy. So why should the Indian people now throw Mr Tata, or anyone like him, a lifeline from funds squeezed from a poor and struggling nation?

Just for the record, in each one of the Manmohan Singh years, Indians have invested more money overseas than there were overseas or FDI investments in India. That goes even for last year when FDI amounted to about $20 billion.

For the past few years the Manmohan Singh government has been allowing aam Indians (ordinary Indians) to take out $200,000 each to buy housing properties overseas. To find out why this happened one must go to Dubai and find out.

Now that property valuations have also tanked in Dubai, Australia, Malaysia and Spain where Indians have made huge property investments, will the government also include them in the bailout package demanded by Mr Tata?

I have nothing personal against Mr Tata. By all accounts he is a fine human being and an outstanding and upright business leader. I also share this opinion about him. But business is business and if the crisis catches some Tata companies and others in its web, then the market should be allowed to take its course. Isn't that what they preach at the Confederation of Indian Industry and World Economic Forum or teach at the Harvard Business School?

Back at our PMO and North Block they measure a crisis in terms of the fall of the Sensex. This, of course, is nonsense, but what else can Manmohan Singh say or do having all along made the rise of the Sensex an index of the success of his economic policies?

In 1992, when Harshad Mehta -- like the Pied Piper of Hamelin -- was taking the Sensex sky high and when the real economy was actually contracting, Dr Manmohan Singh, then finance minister, said that the flight of the Sensex was a reflection of the success of his policies!

To be fair to him, all finance ministers after him too have been focussed on the 'market' rather than the economy and sit on their desks focudsed on terminals telling them about the latest levels of the main indices in the world.

It's true the others were ill-educated in economics and so to best describe Manmohan Singh one couldn't do better than the lyrics from of song from a Raj Kapoor movie which goes: 'Sab kuch seekha hamne, na seekhi hoshiari, sach hai duniya waalon, ke ham hain anari! (I have learnt everything there is to learn, but cleverness / People, it's true that I am ignorant of the ways of the world!)'

India's economy has been growing at over 9 per cent for the past three years and even after the predicted global slowdown is expected to post a growth of around 7.5 per cent. This is not at all bad for a country that seldom saw more than 3 per cent growth for the first half century of its independent existence.

Policy focussed on lifting the Sensex

The GOI's finances are robust and the current account deficit very manageable. But the crisis seems to have seized our minds because of the precipitous fall of the Sensex. This is a real crisis for many and particularly those leaders of government who have salted away huge amounts in the share market.

It is no surprise that all our recent policy initiatives are focussed on lifting the Sensex. It is a futile exercise because the FIIs can pull out far more money than the government's FIs can invest. What our government should instead be thinking off seriously is to bring back, say $100 billion or a third of our foreign reserves, and launch a major infrastructure building programme to boost the economy.

Instead of doing this Manmohan Singh has, true to habit, gone with a begging bowl to Oman and Qatar pleading for investments. A few years ago, Montek Singh Ahluwalia in a rare moment of useful insight had suggested bringing in some of our foreign reserves to fund infrastructure development in India.

The usual bunch of ignoramuses, some former finance ministers and some Communists like Pavlovian dogs howled with indignation, and that was that.

The Bretton Woods Conference of July 1944 took place under the fast receding shadow of the WWII and when the US was literally the last man standing. All other pre-war powers, including the victors, were in a shambles.

The US was now the world's dominant economy and military power. The Soviet Union was excluded from the conference and so a new arrangement was easily midwifed by the US. This system was unilaterally abrogated when in 1971 US President Richard Nixon US delinked the dollar from the gold standard.

In the absence of a standard and a useful regulatory function for the IMF, coupled with the Reagan/Thatcher era that followed, the great private banks were given a license to run amok. We are now reaping the bitter harvest.

The G-20 met under this backdrop. It's a very different world now. For a start there is no towering visionary economist like John Maynard Keynes on the scene. How can there be one like him when the world economic and financial elite lionized the likes of Alan Greenspan for so long?

Or when the world's economic agenda making was privatised and handed over to dubious NGOs like the World Economic Forum? There is no towering leader like Franklin Roosevelt either. Instead, we have a George Bush on his way out.

Except for China's leaders, few others have any capital or standing to make a difference. Not Manmohan Singh or George Brown, both on the way out. After Georgia, Russia is angry and will stand isolated in this crowd. Neither Nicholas Sarkozy nor Angela Merkel has the stature or financial muscle.

But Manmohan Singh would typically read being there as India coming of age under his stewardship. The only good news for us is that our elections are around the corner.

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