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Weekend Edition: India immune to meltdown?

Oct 12, 2008 02:31 AM IST Business Business

A devastating financial crisis has put the world economy on the brink of a recession. Can the Indian economy weather the storm and should Indian investors get into panic mode? From government bail-outs to unprecedented interest rate cuts, desperate measures are being taken to restore confidence in panic-stricken markets across the world.

The big question that was being asked by CNN-IBN's Editor-in-Chief Rajdeep Sardesai on The Weekend Edition was: Is India no longer immune to a global financial crisis? Joining him on the show to try and answer the question were Deputy Chairman of the Planning Commission Montek Singh Alhuwalia and senior journalist and economic analyst Paranjoy Guha Thakurta.


After Friday's figures of the Index of Industrial Production (IIP) number showed just one per cent for the month of August, people are beginning to fear that the country is headed towards a recession.

Montek Singh Alhuwalia was extremely confident when he said that India was not headed for a recession.

"We have been saying all along that we are working and living in a global world so there are interconnections. You are seeing a financial tsunami. Industrialised countries may be heading into a recession. This may have an impact on growth in India. The growth rate this year will be lower than it was last year. Last year we had over nine per cent growth, this year, we estimated about 7.5 to 8 per cent. Depending on how bad the international situation is, we might come to the lower end of the range, but that is very different from a recession," he said.

"I wouldn't put much weight on just one month's industrial production index. There have been situations in the past where one month figures get revised," he added.

What he effectively meant therefore, that it may be an economic slowdown and not a recession - a negative growth rate which will not happen.

He said that for the last three months, the Government had been saying that the growth rate would be slower this year simply because the world economy is slowing down. For India to maintain its meaium-term objective, a slowdown was not a problem because every country in the world, including China, was going to grow slower this year, according to Alhuwalia.

Alhuwalia said that the difference was basically between slow and robust growth.


Paranjoy Guha Thakurta however, had a completely different viewpoint. He said that people like Alhuwalia were paid to be optimistic.

"It used to said that when Uncle Sam sneezes, the world catches a cold. Now that the US is in ICU, we in India should be thankful that we are not yet in the hospital. Dr Alhuwalia is correct that our economy is stronger than the American economy at present, but the point is that it was he, Prime Minister Dr Manmohan Singh and Finance Minister Dr P Chidambaram who wanted - until recently - for the Indian economy to be closely integrated to the rest of the world. There was talk about full capital account convertability, parliamentary approval to raise the cap on foreign direct investment in insurance companies from 26 per cent to 49 per cent. There was talk about allowing pension funds to invest more in the stock exchange, reducing the Government of India's holding in public sector banks to below 50 per cent, lifting the voting rights of foreign investors in Indian banks which is 10 per cent currently. If all these measures had gone through then we would have been in a far far bigger mess than we are in right now," he said.

So it would seem that the Government should be thankful that the integration had not taken place with the US to the extent that perhaps the Government would have liked it to.

Dr Alhuwalia struck back saying that Thakurta was both "confused and wrong".

"It's absolute rubbish to say that we were all gung-ho about full capital account convertability. The Government of India has consistently taken the view that the objective is to integrate the Indian economy into the global economy in a gradual fashion. The thrust has been to be gradual as far as financial liberalisation was concerned," he said.

He also said it was rubbish to say that raising the cap on FDIs would have the kind of financial integration effects that opening up banking systems and allowing free capital movements and free movement of bank products across borders would do.

"Let's try to keep these things clear. If you are asking me whether we were wanting to do things which would have increased the potential instability of the Indian financial system, I don't think that's correct. What we have seen in the US and Europe is the consequence of a very rapid financial innovation which has not been accompanied with adequate understanding of the risks that it creates. India was nowhere likely to do anything like that," he retorted.

He said that India should continue to gradually open up into the global economy. He said that it would be a horrendous mistake to read what is happening today as an invitation to go back on the path that India has entered into.

Dr Alhuwalia added that the world had a major stake in solving the problem and he was confident that the world will not only sort the problem but also will learn what to do in future.

"I am not defending free market capitalism. I am defending the move into an integrated global economy with an appropriate role for markets and also for states and regulation. There is no global regulatory body and frankly that is a lacuna which everybody recognises," he stated.

He added that the International Monetary Fund (IMF) had said that the growth for India for 2008 would be 7.9 per cent and slightly lower for 2009. He said that IMF never said India was going into recession.

He condoned what the Finance Minister said - that the Indian financial system was regulated well, it does not dispay any of the problems that are affecting the global financial system because India does not have a lot of innovative products whose risk characteristics cannot be assessed.

"People in India hearing about problems elsewhere should not feel that their banking system has problems. That's why the Finance Minister and the Governor of the Reserve Bank of India have said that the Indian Banking System is sound and that we are ready to inject liquidity into it and so nobody should fear," he said.


Thakurta said that he agreed with Dr Alhuwalia but that there was the Tarapore Committee which was formed to look into full capital account convertability and that the committee had urged the Government to go about it, albeit very gradually.

"What cannot be denied is that the Finance Minister, in the first budget that he presented under the UPA Government, sought to increase the FDI cap on insurance companies. Having said that, I would like to point out that our regulatory systems have been far more cautious and therefore today we are far better off. As for the IMF - no one really knows how deep, wide and long this recession would be. As early as April this year, the IMF had said that the US economy will grow at 0.6 per cent. On October 8, the IMF says that the US economy by 2009 will grow 0.1 per cent. Frankly, neither the IMF, now we know how deep the impact of this recession will be on India," Thakurta pointed out.

Dr Alhuwalia responded to this saying that in his view, India was in a very good position, assuming that the world gets back to some sense of normalcy.

"In 2009, we are in a very good position to resume our normal growth rate. I am not making a prediction for 2009 as of now, because I am not sure how quickly the panic in the international financial institutions and systems will be brought under control. But I think that if by the end of the current calendar year, the financial panic in the world subsides, the fact is that India's growth potential will be somewhat reduced if there is a loss of export demand - which might happen. But a lot of demand which might support India's growth will be domestic, and it always has been," Dr Alhuwalia .

He was of the opinion that if there is a negative effect on some aspects of investment we should operate contracyclicaly so as to speed it up.

"When an economy slows down, businessmen may postpone or slow down their investment plans but India's need for infrastructure is huge and those investments are long-term. I feel that if the Government concentrates on giving a stimulous to infrastructure growth, we can offset the slowing down and be back to growth rates of above eight per cent next year," he added.


Montek Singh Alhuwalia was full of reassuring words for India, saying that we should not press the panic button too early, but where does the common man - the depositors and the investors stand? Should they be scared?

To try and answer the question were Executive Director at ICICI Bank, B Vaidyanathan and equity investment trader and market expert, Rakesh Jhunjhunwala.

ICICI Bank sent its depositors an SMS on Saturday morning saying: "Your deposits with us are safe. Your bank is capitalised with good liquidity. Please do not listen to baseless rumours. Happy festive season." Does this SMS mean that the bank was nervous?

B Vaidyanathan said that they thought this was a very fine way of explaining to their customers that their things are safe and secure with the bank and that customers should not be misled by rumours.

However, the fact is that ICICI's stock has been hammered and some experts have suggested that maybe the markets know something that the investors and the depositors don't know.

"We have gone on record saying this that there is nothing at this point of time that we know which the market does not know in terms of the bank's safety, liquidity and so on and so forth. We are amongst the highest capital banks in India at 13.5 per cent. In fact, our capital requirement is about 150 per cent at what regulatory requirements are. The customers have every reason to feel safe with the bank as far as the capital position and the liquidity position of the bank are concerned. These could be vile rumours being spread by vested interests. I advise the customers to feel safe and sleep well at night," Vaidyanathan said.

Rakesh Jhunjhunwala agreed saying that Indian banks were well-capitalised.

"Thirty-five per cent of all bank deposits are held as way of Government securities, 7.5 per cent is with the RBI, 13.5 per cent is their capital adequacy ratio. They have raised Rs 20,000 crore last year and I really don't know what can go wrong," Jhunjhunwala said.

There was partly a scare because of the exposure of ICICI Bank's international outfit to Lehman Brothers, which collapsed in the US.

"Suppose four per cent of their assets turn NPA, they have 13.5 per cent is their capital adequacy. Also, 80 per cent of ICICI's exposure is in India and not in the world. So let's not threaten systems and liquidity where there is no problem and let'snot send unnecessary scares down the Indian spine," Jhunjhunwala said.

Vaidyanathan said that the banking system was very sound because 33 per cent was held in terms of Government securities and free cash. Apart from this, the remaining 67 per cent - which is given to customers as loans - is safe as we do not have a concept of subprime loans in India because we haven't ventured into that territory at all.

"There is also no securitisation in terms of no convoluted, complicated and multi-tiered structures. These and subprime loans are what are causing the turmoil in US markets. India does not have these and our regulatory system has been very sound. That is the reason why not just ICICI but the entire banking system in India is actually very sound," Vaidyanathan reassured.


FIIs own about $5 billion in India stocks, which is roughly 1/6th of the total market now. Is the selling pressure going to continue in the weeks and months and how bad will it get at the end of the day - that is the question investors and depositors are asking.

"I don't know whether the selling pressure will continue or not. But I am sure that the market will find buyers irrespective of who the sellers are. By November last year, I was cautioning people against buying but no one was ready to listen and when the time to buy will come, no one will listen again," Jhunjhunwala said.

Rakesh Jhunjhunwala said that he would tell investors to take an informed decision and do look beyond the immediate.

In the end the message was the investors should tread carefully, but for depositors, their money is safe.