India and the American meltdown

Shakespeare’s tales relate a story where the father advises his son, who is leaving for foreign lands: “Neither a lender or borrower be”. There is a lot of wisdom in these words as people who lend without proper security/guarantors or who borrow over and above their capacity to reimburse the loan create havoc not only to themselves and their families but to others who are involved. These people also set a bad precedent that snowballs into a vicious circle. There is another adage that warns: “cut your coat according to the cloth”. But the Americans wanted a sophisticated system to sanction credit to their countrymen and they used to ridicule at the Indian way of conducting financial transactions. Lehman Brothers had a great reputation and management scholars from India took a great pride of joining this great finance company till July 2008, when the cracks appeared and the edifice collapsed faster than WTC or the strike by cyclone Katrina. The world could not believe the way other finance companies like Merrill Lynch and Bear Stearns followed suit.

The whole financial meltdown started by low-income United States households defaulting heavily on their debt obligations. These households had borrowed heavily, from financial institutions to buy homes, to the tune of 1.4 trillion USD. To make matters worse Wall Street experts had converted these loans into complicated financial instruments called collateral debt obligations and European and American banks had heavily invested in these ventures. No wonder, a lot of banking institutions, in the West, got affected. Fortunately Indian financial institutions were not affected as we follow a very conservative approach to lend money and never followed any western practices like collateral debt obligations.

One, very interesting, sidelight of the current financial meltdown is that vedic consultants, financial astrologers and vaastu experts are making hay while the sun shines. Premier portals including Google, Yahoo and MSN and other financial websites are hiring these star gazers at enviable remunerations, in India and abroad.

But globalization has affected India. As the financial meltdown has affected western investors they have little resources to repay Indian exporters. This scenario has affected the textile and garment exporters, and also the cashew nut and seafood containers export from India. It has also affected leather, engineering, gems and jewelry exports. Food products and minerals are also experiencing problems. With all this, the sectors mentioned above are heading for layoffs in their factories and processing units. Around 65,000 employees (working directly and indirectly) for export-oriented companies have lost their jobs during August-October 2008. Besides these, the textile market as a whole, has laid off 7,00,000 employees and more could be on the way out. D. K. Nair, secretary-general of the Confederation of Indian Textile Industry, says that textile mills are running only 3 or 4 days and are operating at 75 per cent of their previous capacity. In Ludhiana, Punjab, the export of woollens and cotton knitwear has come down from 1,300 crores last year to 800 crores in 2008. And things are worse in largely unreported unorganized sector. For example the gem and jewelry business in Jaipur has cut down a lot of workforce due to the United States and the European Union meltdown.

The Reserve Bank of India feels that the growth drivers in India are very strong and these will ward off the effects of the financial meltdown in the United States. At the current juncture the RBI (Reserve Bank of India) report says that the Indian banks should meet the credit demand without impairing credit quality. And to maintain the credit flow the RBI has fine-tuned the priority sector lending norms and emphasized on the implementation of the Agriculture Debt Waiver and Debt Relief Scheme 2008, announced by the Government.

India Incorporated still remains a favourite destination for international private equity funding and inbound mergers and acquisitions. India has undertaken some of the largest deals in microfinance, oil and gas and automotive sectors. The Times of India reports that the value of inbound (M&A) deals has fluctuated from 5.4 billion dollars in 2006 to 12.48 billion till 15th December, 2008. It also says that India invests a lot in international companies to increase its global footage and the value of outbound deals fluctuated from 9.91 billion in 2006 to 13.15 billion in 2008. An example is Oil and Natural Gas Corporation Videsh’s acquisition of Imperial Energy for $2,800 million, HDFC Bank’s acquisition of Centurion Bank for $2,377.50 million and the Tata Motors acquisition of the operations of Jaguar and Land Rover for $ 2,300 million. All these transactions took place in 2008 inspite of the global economic slowdown.

Stanchart Group Chief Executive, Peter Sands, who was on the jury of the 10th Economic Times Awards for Corporate Excellence says: "There will be a shift in the balance of financial power to the East. But I have heard statements that India should not engage with the world. I think that would be the wrong lesson to take out of the crisis. The world cannot do without India - not as a recipient of policy, but as a shaper of the new financial architecture”. India’s financial sector is governed by certain rigid rules and in good times and in bad what succeeds is prudent lending. The secret is to invest in instruments we understand, not complicated stuff. In India the general public, especially senior citizens get paid a good rate of interest that is in the range of 10 to 12 per cent on bank fixed deposits. Even my family and friends, who are abroad, invest in India, as the rate of interest is very low in the west. Fixed deposits in banks are even better than the stock market as the share market index in India has fallen to less than half - from 21,000 to mere 9,000, after the foreign institutional investors (FIIs) pulled out from the Indian markets.

Unless the American economy makes a u-turn fast, things will deteriorate and the coming year 2009 will bring a lot of hardships for people who will lose their livelihood by force of circumstances. A lot of people believe that more things are wrought by prayer than the world dreams of. Yes, we require prayers and people must lead frugal, not extravagant lives to help those in distress at least till this financial crisis is over. India is still pulling boldly through this financial crisis due to the great talent and human resources that we have, and the huge growing market that sustains the economy and also because of a moderately disciplined life that an average Indian leads. Also the average Indian family is an entrepreneurial launch-pad and that is another reason why unemployment is contained till now.

India should also strike a balance between jobs, skills and societal structures in order to avoid unemployment. K. Pandia Rajan writing on India Today says that according to research done by government, India will have 1.3 million surplus untrained and undereducated people. The study also points out that we will have a shortage of 5.3 million really talented people to serve the nation. The National Skill Development Mission has the relevant framework for action, but is caught in bureaucratic red-tape. So we need a strong missionary political leadership to set right the legal structures, procedural obstacles and political apathy. We need really dedicated people for this job. But we need them now, when the financial meltdown is about to strike, in a big way, at employment opportunities that can spiral into a really hurting financial crisis. 

India can also undertake vital changes in the Contract Labor Act whereby the organized sector can create a million jobs. Our National Employment Services must be put in high gear to receive and process applications from deserving candidates without having to resort to any underhand tactics. A stitch in time saves nine and we should not sacrifice talent and production on the altar of corruption at this time when stark poverty can stare at the face especially of the unskilled because, in India, unlike foreign countries we have no doles and subsidies and government funding to look after the old, the feeble and the very young.