Financial crisis not so bad for India
Wed, October 08 2008
First, the subsidiaries of collapsed investment banks like Lehman are being bailed out by entities like Nomura of Japan.
This includes the 2,500 strong back-office operations in Mumbai, apart from the smaller securities set up. Similarly, American Insurance Group (AIG) in India has a tie-up with the ever reliable Tatas who have given a thumbs up to all consumers who were worried about their insurance carried out through this vehicle.
Second, and even more significant, is the fact that the conservative approach to reforms in the financial services sector has ensured that the tremors of earthquakes in the U.S. are being felt minimally in India.
A meeting a few days ago of the regulators for the pension, insurance and other similar sectors concluded with a sigh of relief and pronouncement that slow and steady opening up of the economy has helped in the long run. This is not to say that capital account convertibility — or making the Rupee freely tradable — will not take place. But probably as the regulators have pointed out, this can happen when the economy is at a more mature stage.
Ultimately, therefore, the big losers in the global financial crisis in this country are likely to be the iconic software firms like Infosys, Wipro and Tata Consultancy Services (TCS). Much of their business comes from the erstwhile giant investment banks and that could affect their profitability in the short term. In the medium-to-long term, however, these companies are likely to have greater resilience given their innovative approach in the past to hunting out new markets and customers.
The other area where worries still remain is the pullout of funds by foreign institutional investors from the country’s equities and debt markets. The bourses have been showing considerable volatility ever since the news came in about the failure of Lehman and the domino-like effect on other investment banks.
While the Indian stock markets became volatile, they have not crashed as might have been expected initially. They now seem to be stabilizing as safety nets are being created for collapsed banks, like converting Goldman Sachs and JP Morgan into commercial banks while other banks are picking up some entities cheap like the takeover of Wachovia by Wells Fargo.
As far as the U.S. and even Europe are concerned, the ramifications appear to be unending as the scenario is unfolding into the biggest banking crisis since the Great Depression. Financial institutions considered to have a rock-like stability including Merrill Lynch, Morgan Stanley, JP Morgan and the Lehman Brothers collapsed within days of each.
Some were rescued through various manoeuvres and only Lehman actually declared bankruptcy. Reports reaching here also indicate that many smaller banks are declaring insolvency in the U.S. — a development not being taken note of by the international media which is focusing on the big fish. Thus average people in the U.S. are facing severe hardship. No wonder then the battle is being described as one of Main Street versus Wall Street.
The complex set of circumstances that created the crisis are a fascinating story of greed and over-reach at the highest level of the financial system in the U.S. The solutions being found — widespread bailouts — are even more fascinating; at least in India.
Sushma Ramachandran is an economic and corporate analyst.
By Sushma Ramachandran
Tell us what you think
Reader comments are edited for clarity and may be selected to appear in the print version of the Asian Pacific Post.
