Economic Highlights
New
Delhi, 11 August 2011
India And US Debt Crisis
VITAL TO CHART INDEPENDENT PATH
By Shivaji Sarkar
The US debt crisis and lowering of its
credit rating should be an eye opener to the UPA Government. Whereby, India needs to chart out an
independent economic course. It has to revive the Nehruvian spirit on this 65th
Independence Day, if it wants to recapture the eminent position it enjoyed
during the hey-days of the Non-Aligned Movement which was the country’s
strength.
Prime Minister Nehru though
enamoured by the Soviet Union and having close
ties did not adopt the system of fully controlled economy nor did he try to ape
the West’s fully free economy. He opted for mixed economy and enshrined non-alignment
as the bedrock of India’s
foreign policy. This stood the test of time when the Soviet Union collapsed and
India’s
economy could withstand the jolt with the least shock.
As the world became uni-polar, the
Government and the Opposition decided to shed that unique position to integrate
with the US-led western system. Gradually the country became even dependent on US growth to
chart out its own growth parameters.
The spectacular collapse of the
global financial system --- the Lehman moment ---- in 2008 led to the deepest
contraction of world economy since the 1930s. This started changing the Indian
economy also. The integration and dependence on the US
economy has led to a slowdown that India could have avoided.
Our banking system, known for its
resilience is now in shock mode. The non-performing assets (NPA), losses or bad
loans, are rising critically. Thus, it becomes difficult to take solace from
Union Finance Minister Pranab Mukherjee’s statement that the situation is grave
but there is no need to press the panic button.
Undoubtedly, there is every reason
to panic. Inflation is going through the roof. Foreign direct investments (FDI)
are falling. Industrial and manufacturing growth is stunted. The leading
servicing IT companies, functioning as US and European out-sourcing agencies
are taking a beating. Many foreign out-sourcing companies have closed their
operations here.
More worrisome is whether the last
Budget and the statement of the Finance Minister heavily hinges on the sinking
US to sustain India’s
growth. The Budget projection relied on hopes that the US would stay
strong pulling the world economy along with it.
India needs to learn from the
global sell-off in equities which is worse than the situation after the Lehman
crisis. The US
along with Euro zone, suffering from severe sovereign debt crisis, is leading
the world to a double-dip recession.
It is an irony that large
multi-national corporations (MNC) are still islands of prosperity. How long
they would be able to sustain their large profits remains to be seen. Their
growth despite contempt for national sovereignties is spurred by the US and European
Government’s expenditures made through heavy borrowings. The stranglehold of
MNC lobbies on Western Governments has led them to protect and promote their
interests.
Arguably, many want us to
believe that the US
debt situation is the creation of wrangling between the Republicans and
Democrats. Had that been the case, US ratings would have lowered long back. As
the debt ceiling has been raised 68 times since 1960, and its increase was
considered routine until this debate.
Now no American thinks it to be a routine affair and wants the
Government to tighten its belt, much to the MNCs’ chagrin.
As the Barack Obama Administration
has agreed to an expenditure cut, this is likely to affect the MNCs’ profits.
Given that the US borrowings were virtually going to feed the MNCs’ for
armaments to sustain the ‘avoidable’ war in Iraq, the US-NATO-European
Governments’ involvements in the
Chechnya, Georgia, Libya, Tunisia, Egypt and the Arab world operations
as also food, water and other mundane necessities supplies to keep the soldiers
“happy”.
Clearly, the US expenditure
cut would tell on the MNCs’ health. As it would further affect FDIs to India. Bluntly,
large US borrowings had been
providing funds to MNCs with spare money to invest in countries like India and China. This source is drying out
now. And, might have serious impact on
the supposed engines of growth ---- India
and China.
The Chinese situation could become more serious as it has invested about $1.2
trillion in US treasury bonds. In all likelihood, its maturity time would be
extended thereby blocking large Chinese funds.
India might have to worry
more. The US
spending compromises would affect its global security operations gradually. As
it stands Washington has started pulling out
of Iraq and has a road-map
for a pull-out from Afghanistan.
It might also gradually reduce its involvement in the Indian Ocean and Middle East regions.
Importantly, all this would put
pressure on New Delhi to spend more on
security-policing and defence operations for which it now depends on the US. Be it to
keep Pakistan and China under check or create a security buffer in
the Indian Ocean region.
Further, it could strain the
Government’s finances at a time when it is facing a severe revenue shortage as
stagflation has resulted in reduced tax earnings. Another problem India has to tackle is that its credit rating,
even after downgrading of US
credit rating to AA+, is many notches below that at BBB minus, lowest
investment grade.
Needless to say, this calls for
setting a politico-economic independent path. By hinging on the US economy as
many recent agreements show it would result in giving a new lease of life to US
and European nuclear power companies, large retail outlets and other
operations, which might not do anything for India.
Also, notwithstanding Pranab
Mukherjee’s statement of ‘no need to press the panic button’ as India can manage today, but as the scenario
develops, it would not be easy for India to maintain its financial
strength. The US is bound to
shrink, if not sink, but India
needs strong independent strategies to keep it afloat and maintain its regional
supremacy.
In sum, the Nehruvian spirit
has to be imbibed to chart that course. If the finance mandarins sitting in the
Government do not do that the Opposition has to lead the path. This is a
critical phase and the world looks towards India to chart a new path and
rescue it from the failed Western models. ----- INFA
(Copyright, India News and Feature Alliance)
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