Economic crisis? India's tide has turned

My take on the Article:
Amidst all the bad news surrounding the subprime crisis it's refreshing to read this article in rediff by TN Ninan. I have heard and read Ninan's views in the past. He used to be Business Standard's editor though I don't know what he does now.

Ever since i came over to UK few weeks ago, as it is with the rest of the world, there's been plenty of focus in the British media on the meltdown. And justifiably so, what with the take over of Hallifax and Bank Of Scotland (HBOS) by Lloyds TSB, Northern Rock being nationalized and the latest nationalisation of Bradford and Bingley (8th largest financial services firm in the UK).

As for the rest of Europe, i have read about coupla very big French-Belgian banks being bailed out, Dexia and Fortis.

And you all would know about the nationalisation of Freddie Mac & Fannie Mae and the collapse of Lehman Brothers in the US.

Unlike the US here in the UK, the principal parties have been united in tackling the crisis. Though the Tories keep reminding the nation that it's the boom and bust policies of Gordon Brown which has landed the nation in the mess it finds itself the Tories are lending whole-hearted support to the Labour government in handling the crisis. The Labour government acted very swiftly in nationalising Bradford & Bingley and in ensuring no one lost money. It also ensured that Llloyds TSB agreed to taking over HBOS. BTW, i have a pound account in Llloyds TSB. It's good to know that it's now become the 22rd largest bank in the world with this takeover. Atleast my money is safe!!

But unlike Ireland, where the government has told that all deposits in the banks would be safe with no cap, the UK government has put a cap of 50,000 pounds. Owing to that there has been some flight of money to the Irish banks. Poor Gordon Brown, this couldn't have happened at a worst time. Labor are currently lagging behind the conservatives by 15-22 points. The property prices are falling, inflation rate is at an all time high, mortgage rate is climbing up, companies are publishing lesser or negative growth, there are job cuts all around; pundits are predicting that UK will fall into recession along with Germany and Spain in the coming quarter. Mr.Brown has plenty to worry about. Anyway the backbenchers in Labor are calling for his head and a change in the leadership before the next general elections.

I was expecting some financial catastrophe in India as well. But fortunately nothing really happened. And surprise surprise, India seems to withering the storm, that is if Mr. Ninan is to be believed.

Fine, that's just me rambling over the information that's got accumulated in my head from what i have heard and read in the last few weeks....

http://www.rediff.com/money/2008/oct/04bcrisis.htm

Quoted Article

Economic crisis? India's tide has turned

When the really bad news dominates the headlines, as the western financial crisis has done these past many weeks, the good news tends not to get noticed.

We forget that, three months ago, the over-riding economic problem in India was inflation. So the good news is that the tide has turned.

Not just because the weekly wholesale price index now reflects 11.99 per cent inflation (down only modestly from a peak of over 13 per cent), but because global prices are falling.

Oil has been dipping steadily for weeks, and is now in the mid-90s when it comes to dollars per barrel.

Almost all other commodities too have been slipping -- whether metals like steel and aluminium, or agri-commodities like rubber and palm oil.

The prominent exception is gold, but that comes in a separate category.

To the extent that domestic inflation in 2008 has been driven primarily by imported inflation, this means that the government spokesmen who have been forecasting a drop in the inflation rate by the end of the year are probably right.

And when one looks at the domestic supply scene, the fact that the 2008 monsoon has been a good one augurs well for inflation control in the coming months.

To be sure, one man's inflation is the next man's income, so there will be producers who will look askance at this new trend.

Steel companies, for instance, will have to prepare for a new revenue scenario. But in terms of the overall impact on the economy, this is good news that will now stay with us for some months.

The second bit of good news is how well the economy has held up in the wake of the storms that have been blowing around us.

Whether it is the export numbers for August (up 27 per cent), or industrial growth in July (up 7.1 per cent), or even advance collection of corporate taxes (up a handsome 34.5 per cent till September), the signs point to an economy that has surprising momentum.

To be sure, the stock market has taken a beating and has dropped lower than its index level two years ago; but it was only to be expected that the price bubbles in stocks and real estate would be pricked.

Meanwhile, the fact that the rupee has dipped quite sharply against the dollar (by 15 per cent in the last 12 months) means that all those who worried about what an expensive rupee would do to exports can now quit worrying --exporters have a new price incentive, since the currency movement has helped them.

The third bit of good news is that the system has plenty of defences available, should the financial crisis hit India's shores.

The Reserve Bank has far more dollar reserves than the total foreign portfolio holdings in the Indian stock market as well as short-term overseas debt combined, so no one need fear a currency crisis.

There could be a domestic liquidity problem if foreign institutional investors flee en masse and want to take out dollars in exchange for rupees, but the market stabilisation bonds that the RBI had issued can be bought back in order to pump rupees into the system.

In addition, the fact that India's banks are so well-capitalised, in comparison with both American and European banks, imparts its own stability to the system.

For many commentators (yours truly among them!) who had predicted dire times for the economy because of the multiple problems coming together, all this has come as a pleasant surprise.

What one can hope as the second quarter corporate results start trickling in, is that the system continues to surprise us on the upside.