Decline of the West prerequisite for Hindusthan as global power -- RV

Tuesday, September 23, 2008 3:16:00 AM (DNA)

Failure of American financial institutions is a reason to rejoice

R Vaidyanathan

The decline of the West is a pre-requisite for the emergence of India as a global power.

I have been closely watching the reaction of our press, particularly the business papers and TV channels, to the implosion that has taken place in the Western financial markets and institutions.

Lehman Brothers, the original cotton trading company of the mid-nineteenth century fame from Alabama, is no more.

US government is acting like the erstwhile Soviet Union in nationalising institutions and bailing out market mayhem.

Our experts and analysts are pathetic in responding to this. Some of them are whining and the rest ad nauseam repeating about globalisation and impact on India, etc. It proves once again that the colonial gene is embedded in all of us and it refuses to recognise opportunities and turns advantageous as disasters.

First thing first. The decline of these institutions — many more to come — is the best thing that has happened to countries such as India, which are poised to play a larger role in global financial affairs.

Let us have some facts. India had 25% of global income in 1500 through 1700; by 1820, this was down to 17% and by 1951 to 5%; in 1998, the country’s share stood at 5.5% (according to Angus Maddison in The World Economy: A millennial Perspective, OECD Development Centre Studies -2007; Table-B-20 Appendix B; pp263).

We need to reclaim our position in the world — it is just returning to where we were. By 2025, we should have at least 25% of global GDP.

This requires strategic thinking and a new mindset. We are not going to be easily accepted as a global power. There is going to be a tussle between existing powers, declining powers and emerging powers.

Nobody is going to offer the seat in the top table to us by request or by supplication. We need to earn it and be in a position to demand it. We need national purpose and a single minded devotion to achieve it.

The decline of the global financial institutions provides great opportunities since our growth is primarily due to our domestic savings.

Foreign direct investment and foreign institutional investment put together is not more than 8% in relation to our gross savings in any one of the past several years.

Also, nearly 80% of our domestic savings of 35% comes from household savings. In comparison, the USA has meagre or negative household savings.

It has been running a consumption economy for too long, sustained by the savings of other countries, particularly Asian. It has also taken financial convergence to the extreme — anybody can do anything.

Otherwise, it would be difficult to explain a good old traditional insurance company such as AIG having such significant exposures in derivative products.

It is important to recognise that Europe is past, USA is the present and countries like India are the future. USA is slowly getting into a situation of the UK, which started declining after the Second World War.

What should India have done?

Immediately after the collapse of Freddie Mac and Fannie Mae and the crisis in many investment banks, our finance ministry should have called a meeting of major banks, industrialists and some — shall I say obscenely rich — NRIs and announced the readiness of some Indian groups to acquire some of these institutions after due diligence.
This is just to put the cat among pigeons and announce to the world that we have arrived. It is not required that we should acquire these sick entities.

It is just to express our readiness and also to tell the world that we want orderly transition as a responsible global power. It is not late even now, since many more commercial banks of US origin are in the queue.

However, India was silent and generally mumbling that we are not affected, etc. It was behaving like a small sidekick country.

The country should call for an alternative global financial architecture, which is built on the real economy and not on the paper economy.

The disconnect between stock markets and the real economy was accentuated by the derivative markets where the tail had begun to wag the dog.

This fact has been told many a time by many from countries such as India.
India and China should play an important role in evolving the alternative global financial architecture and for which we should start working.

The existing institutions have failed and the existing market mantra has been exposed in the most compromising position wherein the market and government are caught in the act.

Unless we internalise the fundamental truth that the decline of the West is a pre-requisite for the emergence of India as a global power, we are not going anywhere.

To do that, we need to be pro-active and not supplicant. After all these acts of thievery, thuggery and market manipulations and mis-sales, it is interesting that no one categorically and unambiguously and unequivocally proclaims that the US financial system is a big sham and the regulations are totally ineffective and the marauders and vandals have been running major institutions from smoke-filled pubs .

That is the fact.

To build a new architecture, India should take the lead. Unfortunately, we have the US lobby, Chinese lobby, Pakistan lobby and all sorts of lobbies in the Capital, but no India lobby yet.

Until we do, we cannot but be mouthing inanities and discussing inconsequential things.

The author is professor of finance, Indian Institute of Management — Bangalore, and can be reached atvaidya@iimb.ernet.in.
The views are personal and do not reflect that of his organisation.
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