Thursday, November 13, 2008

Lessons for India from the ongoing global recession

Lessons for India from the ongoing global recession

The state of the world economy is indicated by the following gloomy reports.

First, it should be noted that economy is delinked from finance system.

Second, the finance system is governed by fetishism of money dealing with currency as a commodity inventing bizarre instruments without or with little underlying ‘real’ assets. Witness the instruments such as index funds or participatory notes (which allow for hawala transactions from resident Indians in the Indian context).

Third, the finance system lives on intense speculation, greed and self-aggrandisement not unlike the Indian political system. This is casino-brothel capitalism.

The extent to which the finance system of a country is delinked from the economic system (that is, the measurement of real wealth of a nation by valuing the productivity of assets) is a measure of the volatility noticed in the stock markets.

It is unfortunate, in the Indian context, that there is a regime run by 10-Janpath chamcha-s who care little for enhancing the nation’s wealth. The substitute PM and the self-proclaimed main-hoon-na FM seem to operate like PM and FM of the Dalal Street and not of the Indian economy. Witness the reluctance to reduce the oil prices even though the world-wide prices for oil have been reduced by over 50%. This together with the tax reliefs given to aviation fuel (allegedly to rescue airlines) indicate that there is excessive patronage system (main-hoon-na) in operation. The permission given to resident Indians to indulge in hawala transactions manipulated through participatory notes is a crime of the worst order. The participatory notes should be nationalized and the holders of the notes booked under Benami Transactions (Prohibition) Act, making them accountable to prove the source of their funds held as p-notes. See the bare act which provides for legal remedies for the treasonous financial dealings. The next Government should within the first 100 days announce the nationalization of the P-notes, ban all derivative instruments (puts, calls, credit swaps, P-Notes) created by FIIs, switch the system of financing India’s projects by stock-market medium to direct investments by foreign technology companies directly into specific development projects. India should take a cue from China on this financial system reform.

The economy is measured by the strength of the capacity of the inviduals and guilds to produce income-yielding wealth and to create employment opportunities. These should be the only two true measures to declare a PM or an FM as truly concerned about the nation’s economy. Luckily, Indian currency is not fully convertible. Thus, there is substantial leverage available in putting an effective financial system in place to shield the Indian economy from the global financial sharks and recession in the developed economies. Luckily, again, India is not excessively dependent upon the export earnings to build up a fragile foreign exchange reserve (quite unlike China which is totally exposed to the world markets through dependence on exports). The economic steps to be announced by the next Government should include a declaration of development of an energy policy based on thorium-based breeder reactors to produce 40,000 MW additional nuclear energy within the next 20 years, to expand research and development of wind-energy, geo-thermal energy, hydropower, solar-energy and other renewable energy resources. There should be a cut-back on the expansion of the auto industry dependent upon imported fuels. The ISRO technology available for hydrogen cars should be used in production facilities within the next 5 years.

There is need for an economic ministry in GOI. This should consist of experts who are nationalists and not the 10 Janpath chamcha variety nor those who believe that India should catch cold when Uncle Sam sneezes.



Rajesh Mahapatra and Gaurav Choudhury, Hindustan Times
Email Author
New Delhi, November 13, 2008
India loses $63 billion in six months
India’s richest are not the only ones who have lost billions in net worth amid the global meltdown. The country’s central bank has seen its foreign exchange reserves shrink more than $63 billion — enough to fund 600 Moon missions — in less than six months as exports slumped, trade deficit widened on a surge in the oil import bill and foreign investors pulled out of the stock market.
Lately, the reserves are falling at an alarming pace, squeezing much of the room for manoeuvre that India had in the face of the ongoing financial turmoil. The fall was a staggering $31 billion in October, or almost half of the decline since May 23, when reserves touched a record $316 billion.
The fast depletion has serious implications, as it could bring more pressure on the rupee, which has already depreciated about 20 per cent this year and made everything from imported machinery to foreign travel and education more expensive. A weaker rupee could also reverse the recent slide in inflation.
“If this trend continues for more than three months, there could be a problem,” said a top monetary policy official, who didn’t want to be named because the issue is market sensitive.
The government, however, is hopeful that the situation would change once its policy responses begin to play out and stability returns to global financial markets. “We are trying to minimise the drawdown on reserves,” said Suresh Tendulkar, who heads the prime minister’s economic advisory council. He said the Centre is trying to induce NRI deposits and tap sovereign wealth funds, especially from the Gulf. Efforts are underway to revive exports growth, he said.

Germany enters recession, China output growth hit
13 Nov 2008, 1713 hrs IST, REUTERS

LONDON/TOKYO: Germany has fallen into recession and China's industry output growth waned to its weakest in seven years, data showed on Thursday, reinforcing evidence the financial crisis is plunging the world into a painful downturn.

Seeking to limit the fallout from a crisis that began when the U.S. housing market collapsed more than a year ago, Japan said it would offer up to $100 billion to the International Monetary Fund (IMF) for emerging economies.

The impact of the worst financial conditions in 80 years was felt sharply in Germany, Europe's largest economy, where the economy contracted by 0.5 percent in the third quarter, putting it in recession for the first time in five years.

The decline -- much sharper than the 0.2 percent forecast -- was accentuated by German export growth grinding to a halt.

"We are going to have to face up to a very difficult and long-lasting economic crisis," Germany's Deputy Economy Minister Walther Otremba told Reuters.

Analysts agreed with that grim forecast.

"The headwinds of the financial crisis and the global economic slowdown are blowing right in the face of the German economy," said Carsten Brzeski of ING Financial Markets.

"Even more worrying, the full impact of the financial crisis still has to unfold," he said. "If you think today's numbers are already bad, just wait for the next quarter."

In China, which has unveiled a 4 trillion yuan ($586 billion) stimulus package, annual industrial output growth slowed to 8.2 percent in October, its weakest showing since October 2001, as the global downturn took its toll.

Among corporates, British telecoms company BT Group said it was cutting 10,000 jobs at home and overseas.

Stock markets tumbled again in Asia. Tokyo shares slid 5.3 percent and the price of oil hit a 22-month low at $55 a barrel on worries that a recession will curb demand.

Japan on the brink financial crisis: Nakamura

13 Nov 2008, 0947 hrs IST, REUTERS

Nakamura is thought to have called for an interest rate cut of 0.25 percentage point with two other board members on Oct. 31, when the BOJ cut

rates by 0.20 percentage point on the casting vote of Governor Masaaki Shirakawa after the board was split 4-4 on the proposal.

Following is a summary of Nakamura's speech on Thursday:

"The global financial crisis could slow down the world economy. Japanese economy could be on the brink of a drawn-out adjustment phase. The downside risk to the Japanese economy is rising further." "After the policy meeting on Oct 6-7, in the United States, we've seen weakness in consumption and output, and marked deterioration in consumer sentiment, on top of a slump in housing markets." "In Japan, exports and output, which have been leading the economy, were both confirmed as weak in July-September." "The turmoil in overseas financial markets are starting to affect Japanese markets, which had been relatively stable."

"The yen is appreciating, particularly against the euro, worsening exporters' earnings... Capital market conditions, including commercial paper, have deteriorated as investors are becoming cautious, raising companies' dependence on bank loans" "At the same time, Japanese banks' lending attitude is turning cautious due to concern over the economy and the earnings outlook, suggesting a change in easy monetary conditions." "Capital spending is likely to be weak for the time being. But it is unlikely to fall sharply if expectations of mid to long-term growth in global demand will be maintained."

"As the latest turmoil in the global financial markets is increasing pressure on the real economy, the risk of further slowdown in the world economy is rising and it's getting hard to predict when it will stop decelerating and accelerate again. "There's the risk that growth expectations in emerging economies and resource-rich countries, which have been propping up the world economy, will ebb, which could further push down the economy in the Western developed countries."

"The emergence and bursting of the bubble this time was not necessarily caused by the subprime mortgage problem alone. "The world economy grew steadily from 2002 to 2006 on the back of emerging economies and U.S. consumption while interest rates remained low worldwide thanks to globalisation, providing very accommodative monetary conditions. "This nurtured expectations for stable growth and firm asset prices to continue, resulting in a massive fund flow to money markets and a huge distortion in the market pricing of assets. "I understand adjustments are now taking place in the wake of the bursting of the bubble that had created a big gap between the value of assets based on fundamentals, and actual assets and debts. "This situation is similar to the bubble and ensuing financial crisis that Japan has experienced, and a recovery in the balance sheets (of Western banks) will take a considerable time."

"We judged that we should pay attention to downside economic risks while maitaining our basic stance that we will conduct policy in line with our assessment of the economic scenario and risk factors." "We will also ensure stability in financial markets by conducting appropriate market operations."

Major world economies appear in recession: OECD
13 Nov 2008, 1555 hrs IST, AGENCIES
PARIS: Leading industrialised nations appear to be in a "protracted" downturn, with the US, Japanese and eurozone economies likely to shrink next

year, the OECD said on Thursday.

The Organisation for Economic Cooperation and Development predicted a return to modest growth in 2010 but warned that the United States, the world's largest economy, would suffer a whopping 2.8 percent contraction in fourth quarter 2008.
It called for further government stimulus measures and steps to shore up financial markets but also warned against any move that would distort competition or threaten the operation of open markets.

The OECD, the Paris-based grouping of the world's 30 most developed countries, issued a one-page statement ahead of an emergency summit in Washington Saturday of 20 developed and developing nations aimed at dousing a global financial and economic firestorm.

"The OECD area now appears to have entered recession," the statement said, with OECD projections pointing to "a protracted downturn." It sees the OECD countries contracting 0.3 percent in 2009, after growth of 1.4 percent this year, before rebounding to 1.5 percent in 2010.

The US economy will contract 0.9 percent in 2009, Japan 0.1 percent and the eurozone 0.5 percent after posting respective gains this year of 1.4 percent, 0.5 percent and 1.1 percent. In 2010, according to the OECD, the United States should grow 1.6 percent, Japan 0.6 percent and the eurozone 1.2 percent.

The OECD said the US econony shrank 0.3 percent in the third quarter this year and would contract 2.8 percent in the fourth, thereby meeting the traditional measure of recession -- two consecutive quarters of negative growth.
The United States will not enjoy positive growth -- 0.6 percent -- until the third quarter of 2009, according to the OECD.

The Japanese economy will also see negative growth in the final two quarters of 2008 before returning to positive territory -- 0.8 percent -- in first quarter 2009. But in the third quarter of 2009, Japan will slip back and its economy will contract 0.3 percent.

In the eurozone, the economy will not begin to grow again until the third quarter of 2009, when it should expand 0.1 percent.
The OECD said its analysis was based on an assumption that the "extreme" financial market distress that erupted in mid-September would be "short-lived" but "followed by an extended period of financial headwinds through late 2009, with a gradual normalisation thereafter."

It said it expected a continued moderation in inflation while "against the backdrop of a deep economic downturn, additional macroeconomic stimulation is needed," suggesting that tax cuts for credit-strapped households could prove effective.

The OECD said that in the United States and Japan the scope for additional interest rate cuts to spur momentum had narrowed. The US Federal Reserve has already slashed its benchmark rate to a record low 1.0 percent while the Bank of Japan last month reduced its key rate to 0.30 percent.

Many OECD members in recent weeks have adopted vigorous measures to revive their struggling banks, notably through direct injections of capital and credit guarantees aimed at inducing them to start lending money again. "The need for further measures to stabilise financial markets cannot be excluded," the OECD said.

It also called for "international cooperation ... to avoid measures that distort competition" and said that regulatory and supervisory frameworks would have to be "re-examined." "When addressing these issues, it will be important to focus on reforms to the global financial architecture and at the same time resist pressures for a wider rollback of open markets which would prove costly," it added.

Emerging economies more vulnerable to credit crisis: Lamy
13 Nov 2008, 1840 hrs IST, PTI
LONDON: The World Trade Organisation has warned of a deteriorating trade-finance situation in coming months, stating that emerging economies

would be more vulnerable to the impact of fund scarcity.

"The situation is likely to deteriorate further in the months to come," WTO Director General Pascal Lamy said addressing trade ambassadors in Geneva yesterday.

Underscoring the importance to keep the flow of trade-finance, Lamy said, "Countries most vulnerable to shortages of trade-finance are the emerging market economies on whom we are counting to sustain trade and economic growth as the developed countries slow down."

Lamy said private banks, international financial institutions and export credit agencies have confirmed that the market for trade-finance has severely deteriorated over the last six months and particularly since September.

"The financial crisis is a wake-up call indicating that the world economy cannot grow above the limits of its real production, and that feeding it by debt and liquidity may only provoke severe corrections," the WTO chief said ahead of the G-20 Summit on November 15 in Washington, called by US President George Bush to discuss the financial meltdown.

In fact, the G-20 Summit cast a shadow on Lamy's meeting where heads of multilateral institutions like the World Bank and International Monetary Fund remained absent.

Conveying a message to world leaders who would assemble in Washington on Saturday, the WTO Chief said, "The world economy is slowing and we are seeing trade decrease. If trade-finance is not tackled, we run the risk of further exacerbating this downward spiral." The market at present estimates the liquidity gap in trade-finance at about USD 25 billion.

Testimonies in US Congress

Hedge fund chiefs blame the system for financial crisis (13 Nov. 2008)

The statements by George Soros and others suggested that hedge fund executives and lawmakers were reaching a consensus in the wake of the credit crisis that the status quo, in which the funds largely escape scrutiny, was no longer tenable…

Mr Soros pinned blame on the “financial system itself”, while James Simons, president of Renaissance Technologies, criticised credit ratings agencies, which he said had facilitated the sale of “sows’ ears … as silk purses” through “fanciful” ratings of mortgage-backed securities.

Aurangzeb Naqshbandi, Hindustan Times
Email Author
New Delhi, November 14, 2008
First Published: 00:03 IST(14/11/2008)
Last Updated: 00:07 IST(14/11/2008)
Haj officials want 5-star facilities

The government has taken a serious note of the Central Haj Committee’s letter to the Indian consulate in Jeddah, seeking five-star accommodation and separate facilities for its 100-member delegation, comprising officials and their family members, during the pilgrimage.

The visit can set the Haj committee back by Rs 8 crore. The government has questioned the committee’s decision allowing families with the officials at a time of economic downturn.

The external affairs ministry has sought the list of officials, with their antecedents.

In a letter to the Consulate General of India in Jeddah, Saudi Arabia, Haj committee chief executive officer Mohammed Owais sought separate accommodation, with better kitchen and toilet facilities, for officials and their families “befitting their status” during their stay in Mina. He said the delegation be provided five-star accommodation in ‘Markaziyah area’ during its visit to Madinah Munawwarah and their transport arrangements made.

A Haj committee official said it was a routine practice and government money was not being used. “The Haj committee does not use government money. It’s customary to send a delegation, which may include family members,” he said. Despite repeated attempts, Owais could not be contacted for comments.

“If the Haj committee is not using the government money, then whose money is being wasted?” asked Dr Zafarul-Islam Khan, head of All-India Muslim Majlis-e Mushawarat, an umbrella body of Indian Muslim organisations.

“It’s very unfortunate. The Haj committee is overcharging the pilgrims and spending their money on fun trip,” he said.

The committee’s move is in violation of a government order, asking all ministries to cut down foreign and domestic travel under the mandatory 10 per cent cut in the non-plan expenditure, sources said.

There was no need for huge delegations to Saudi Arabia, Khan said. “The past experience shows that the Haj committee officials pose problems to the Indian staff,” he said.

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