( As global markets crash to ominous signs of ill-health following the US credit rating downgrade, India needs to wake up and drink the coffee. It will be naïve to pretend that we are insulated from its potential downsides).

By Sanjay Jha


This quite does not seem to be an august month. At least, not just as yet. Standard & Poor’s casual miscalculation which overestimated the US deficit by a staggering USD 2 trillion ( more than India’s GDP) provided the perfect ludicrous distraction from the feared catastrophe of another economic meltdown, as attention shifted to New York and Washington from the Eurozone after US public deficit took center-stage , a few days ago. Cynics promptly rubbished the AAA downgrade of US debt to AA +; hadn’t these so-called research experts with their cracked crystal balls made those rosy predictions on several mortgage assets , gleefully dishing out AAA certificates as if they were lottery tickets during the halcyon days of booming housing prices in the US which later made them into a laughing “ stock” when Lehman Brothers went bust? . And probably pricked that gigantic bubble ? So S&P rating is got to be taken with a pinch of salt and pepper, shouted an indignant US Treasury. And a perturbed White House.

The US still remains the powerful Big Brother, our sole superpower, but its mighty reign is reaching a moral nadir, its once vaunted reputation , a crestfallen cul-de-sac. With consumer confidence also touching a depressing low, US President Barack Obama will need all-party support to increase personal/business taxes to pass on the rising cost of interest bill which is inevitable given lower ratings. Of course, competing research agencies such as Moody’s and Fitch are at least so far, deafeningly silent and status quo. But in these times, circumspection is common-sense. Expect the worst. After all, America nearly defaulted on its honored sovereign commitments.

Dysfunctional governments is an ecumenical issue; you can see it as Silvio Berlusconi continues his midnight orgies amidst ballooning fiscal deficits, as Italy nonchalantly queues up alongside Greece, Ireland and Iceland, in imminent danger of joining that notorious default club. Quintessentially, the reason behind the current global crisis is the somnambulant policy-making of governments which has matched the reckless flamboyance of the Wall Street fat-cats of 2007. There seems to be a suicidal predilection, with each making gargantuan blunders with effortless comfort. What we need is seminal path-breaking statesmanship ; what we have instead is conventional politicians, not even possessing what the classical writers would call, bare-bones verisimilitude. Political leadership world-wide needs not just a rejuvenation, but a renaissance. Obama , amongst the lot, is still our best hope. We need him. Because the world needs America, despite all the hullabaloo and hype surrounding the coronation of the China-India axis. The Asian giants need to be patient.

Noticeably, Standard & Poor’s downgrade of US credit rating is perhaps less on account of pure economic fundamentals, and more with perceived political risk, its luminous skepticism of it’s inability to take swift, corrective measures. The Republican-Democrat shadow punching on matters ostensibly commercial such as tax increase and cut in public spending have assumed a palpable political flavor , with the looming Presidential elections next year. After all everyone remembers; It’s the economy, stupid! In effect, the S&P downgrade neutralizes the extraordinary public relations surge in Obama’s popularity ratings following the Osama bin Laden mission. In the world of politics, success is as short-lived as your last breath.

Greed is good, said Gordon Gecko. But for America greed has become God. It was that breathtaking avarice that plunged the world into it’s first ever serious depression a few years ago since that memorable gold-rush fantasy of 1929 , when Wall Street hubris turned investment banks into dismal financial ghettos. Their intrinsic absurdity is impacting us yet, all over again. The ghosts of the past still roam in immaculate suits. Crisis cascades, and takes long to evaporate. Moreover, it is cross-border. But nothing stops man from the ultimate déjà vu; self-destruct. The fear of a US double-dip recession is genuine, but hopefully politicians, , policy-makers, regulators and commercial and investment bankers have learnt their lessons. Hopefully. The Tea Party may have begun in deadly earnest . But the party might still come to a premature end.

As the crisis reveals, there never can be a fully laissez-faire capitalist system as deemed in microeconomic theory , or an asphyxiating communist one. Both possess grave downsides when carried to extreme lengths. China embraced modern capitalism, but managed that with inelastic government intervention, resulting in China today owning 40% of US debt and buoyant reserves. America, obsessed with free markets and liberal policies , has always decried government control perhaps backed by compelling GDP data. But as 2007 and Alan Greenspan were to prove, it doesn’t work to drive effective regulatory controls to the periphery . The two will need to co-exist, but at least until the world economy stabilizes, which might yet take some more time, the role of government in fiscal and monetary management will need to primordial. Politicians to survive will need to understand economics. The voters will expect them to. Even inspirational speeches need tangible bottoms, and I dare say, tangible bottomlines, to sit on.

America is paying the price for gluttonous consumption, not backed by genuine spending power but unbridled debt , accentuated by disastrous international forays in Iraq and Afghanistan, besides humongous mindless funding of a duplicitous Pakistan. Somebody needs to pay for those profligate excesses and inane political experiments . Finally, the beleaguered American tax-payer will end up paying more for those myopic misadventures. It should be expected. It will be tough living in Minnesota or Maine.

In India, we are beginning to relive the pre-1929 American era of hysterical, artificial exhilaration. The first signs of delusion are the collective chorus; “We are generally insulated by transatlantic seismic shocks”. Sure, we are relatively better off, but severe infrastructural shortages, insufficient reforms, inchoate, obsolete land acquisition laws, poor skill quality and rampant corruption hang precariously like an albatross round our necks. We need both FII ( a strong equity market lowers cost of borrowing) and FDI investments ( for long-term funding which is not hot money) . Worse, at 36 US cents per- day per- person income covering 700 million, we have a lot to worry about. A 8% GDP growth in India is nothing to get excited about, we need that just to address basic human needs yet. The social/economic cost of even a hundred basis points drop in GDP for India is astronomical. So we need to care about the mood of Moody’s.

Exponential growth of Indian stock-markets is a media-created mirage, everyone happily forgets that a collapse also works in reverse geometrical series. Sometimes I feel we are carelessly sandbagging ourselves. The “ jugaad” mentality is disconcerting. In a wired commercial world , there are no overnight naps to be taken. We have clear advantages, but complacency and procrastination , has been our perennial nemesis.

For India the worry would be high inflation ( caused by food prices and short-supply of oil) co-existing with a slower economic growth as interest rates remain on the upper side and capital markets become sluggish. It may not be stagflation yet, but flat growth is possible, unless US recovers quickly or the current apprehensions are exaggerated. Monetary policy, reforms, ruthless execution of projects, public-private partnerships in infrastructure and cutting down on government -funded leakages will be necessary. Discipline ought to dominate our discussions.

For Dalal Street market punters unnerved by the sudden pessimism, it is good to borrow from boring empirical evidence. August, September and October are not good months for stock-market investing. The others equally worse are January, December, February, November, March, April, May, June and July.

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