Dealing with Finance Crises

John Samuel


We are in the beginning of the slump. And it may deepen by the second half of 2009. My sense is that it will take three to four years to recover- i.e. by 2012. Though there will be slump and reduced production and demand in the US, most of the emerging economies got a growing domestic market- and manufacturing capacity. In the 1930s- most of the present emerging economies did not have a growing market - and the primary trade was in commodity- when the commodity market- primarily exported to Europe etc collapsed, the impact of the crash (1929) also adversely affected Asian countries in a big way.

So this will be a deeper recession than the earlier ones in the late seventies, and late 90s. But the world economy may be more resilient now- due to more coordinated efforts, quick remedial actions, growing market-with absorption capacity and productive capacities, and potential recalibration of the currency market. It is also due to the fact, Banking and financial sector is more regulated in the emerging market. So the central banks in Asia countries got almost 4 trillion USD as deposit. Many of the established companies in India, China and the gulf are actually cash-rich: so the ongoing credit crunch may not affect their expansion plan so much- though they may delay it in the very short term.

Those who will be severely affected are:

1) Real estate business- that is primarily driven by the credit market. So many builders will burst the demand will decrease and they will not be able to pay back the mortgage. This is also because there is lots of short-term foreign investments- that too based on international credit- and that will dry up. But our banks like HDFC are relatively safer as their terms for housing mortgage are rather on conservative terms (floating interest rates) and mostly given on credit worthiness.

2) A section of BPO and IT will be affected. But not all of them will be wiped out- because many of the Western countries will find it cheaper to do operations in India. However, they may renegotiate for lesser price- and this may result in reduction of salaries and benefits across the board in BPO and IT sector. Such cuts will not be more than 10 to 15% - it may not drastically affect the consumer market- though there will be less demands for cars and mobile phone etc.

3) Shipping, Airlines and transport may be affected in the short term

4) Hotel and tourism will be affected too.


Though India will be certainly affected- there is less reason to panic- as this can actually turn in to a great opportunity for India.

There has to be short-term and long term measures to deal with the crises..

Here are some possible options-

1) Stimulate demands- by substantial government expenditure in the area of rural economy, infrastructure, and agriculture. ( FRBM-2003- needs to be scraped)- A neo-Keynesian strategy with a focus on rural economic generation may help in many ways.

2) A review of the existing financial and banking framework- and ensuring that we have a robust regulatory framework that do not stifle growth and at the same do not expose us to big volatile financial market elsewhere.

3) A coordinated efforts by all the major banks, corporate actors and policy makers to develop a strategic framework to restore investor confidence, ensure that there are no drastic cuts in the jobs and to make sure that the new stimulation for demand, monetary policies, and investment patterns are balanced. For example, the usual steps are cutting interest rates, cutting tax in some crucial sectors, ensuring the stock market stability- by banning/regulating short-selling and sudden withdrawal of international investments- a more coordinate strategy to make sure that Stock exchange and currency are stable.

4) Massive tourism promotion- with cheaper price-hotels may have to renegotiates the cost of labour and cut the prices by fifty percentage. Government should go out of way to get tourists- particularly from Middle East and Europe and ensure a sort of "value for money" tourism.

5) A strategic trade-framework- particularly with Asian , East European, Central Asian and emerging African economies- this may help us in the long run. Actually Central Asia will again emerge in the next phase. So it is important for India to strengthen strategic relationship with Iran, Central Asia and Afghanistan. Central Asia also got so much natural resources.

6) A well coordinate programme to regenerate the rural economy by a clear plan for boosting Small and medium scale industries- with a value-chain process- that also create markets as well as stimulate demands.

7) A multi-sectoral task force headed by the Prime Minister to do every day assessment and weekly action plan- in the next one year. In fact NREGA can be redesigned and used as a major means to stimulate demands- by extending the area of operations.

8) A careful and well planned security action plan( along with top-end intelligence inputs) to make sure that there is no political disruptions, major sabotage, or terror attacks that would paralyze the economy. There has always been a connection between economic crisis, violence, terror and war. So the next three years- government will have to be very vigilant.

9) It is important to call an all party meeting- and also a meeting of all finance ministers and chief ministers to make sure that at all levels we have thoroughly coordinated effort to stimulate demand as well as growth, to restore investors’ confidence and to ensure coordinated intelligence. Government should also think of declare a package of something like US$ 250 to 350 billion for stimulating demand in the next two to three years.( this will send positive signals about the confidence of Indian economy)

In fact, India can actually use this challenge as an opportunity to rise up to the occasion and emerge as a much more economically and politically stronger country. But I wonder whether our present or even potential leadership - in the post election scene- may have the political and economic imagination to make use of this opportunity
And transform India and south Asia.

Every economic crisis is a potential warning signal for a politics of fascism or politics of transformation. We are in the midst of a defining period- like the one from 77-83. There are defining periods of history- that actually influence and shape the world for the next twenty to thirty years. The period from 2008 to 2012 will be such a defining phase of history- and the world will not be the same after 2012- there could be high profile disruptions, assassinations, economic troubles and political turmoil- and eventually the birth of a new paradigm. If we look at the word- this happened between 1925 to 30, 1945 to 50, 1977-82 and now at the end of the Regan-Thatcher paradigm- we are getting in to the transition period of 2008 to 12.

It is those who an capture the political and economic imagination- it is those who can come up with big ideas- and possible way forward- will influence the world till 2030 or 35.