panch-tattva talk…sub-prime crisis and India

Friends,

If you recall I raised eyebrows at the matter of all asset classes moving up together since about a year and half ago. This seemed unsual for in normal times this does not happen. The real estate and gold etc have inverse corelation with equity stocks . There are many other such combinations. I also thought aloud that the world was heading towards a crisis of grave kind. What will be character of crisis or its magnitude , was unknown to me at those times when I wondered at what was happening. The crisis turned out in the form of ’sub-prime lending’. The magnitude of this crisis was so huge that no body could fathom its size in the beginning. It was only later that the estimates were made but none could capture the real size of it. This crisis knocked at the doors of many an economies.

 

It was even earlier that I was wondering at the speed and volumes of capital flows towards India and which fueled the economy and pushed up stock prices. The economy benefitted greatly but it was the stocks that crossed rational levels of prices. The stocks have since then corrected a graet deal but the economy still kept pace till upto Feb 08 but gave in Mar 08 when the growth figures turned out to be lowest since last six years. The saving grace is that the growth is still there. The growth in India has come about not because of any thing else but the infusion of capital. The reforms have made environment conducive to inflows but reforms have not been resoponcible for growth to that extent as the capital infusion. The reforms have been half heartedly pushed here. Now while the reforms have not taken a backward direction but the atmosphere is straunful and is interefering with the inflows. The March 08 growth figure is just 8% against far better rate of growth over last five-six years.

 

I also had given another angle about the US Sub Prime crisis earlier. It was that the surplus of oil money and the savingd under pension schemes in USA, Europe and Japan became such large pool that they needed parking place where ever possible. For this reason the China was wooed and every nation with political stability was eyed. The ideological differences were put behind, not to say that these differences will not resurface. They are not creaing any trouble for no nation is seeing any great disadvantage presently. When investment in developing large economies started pushing up stock prices as well as land prices beyond comfort level, the need arose to invest capital back in USA. The large investment banks saw it fit to lend monies for purchase of housing stock  which had had a good run up already. The sub-prime borrowers became daling but with some discomfort at gross basis. Some agressive bankers devised the means of bundling the loans to sub-prime borrowers, get the rating done and hand these down to gullible investors ie hedge funds and the like. The gullible investors in fact were hard to find as the big money was involved. The banks found means to finance the willing takers. When the real estate prices tumbled as the loose money was already tied up and when the sub-prime borrower found it hard to service the loans taken , the lid on crisis can was blown off. The rest of the story is known to every body.

 

The govt. in US got alerted and US Fed saw the financial structure cracking , the resultant action was to lower the interest rates , create market for the housing stock on offer and provide succour to sub-prime borrowers. It made sense politically and economically but only as remedy and not as decent policy.

 

Now, when the banks have written off the losses to a good extent, there is some sense of relief. In the new light , however, it is economies like India’s have to grow , grow as the more of the oil surplus and pension funds will be invested here perforce. Down the line those who wished to have decent life post retirement on the strength of savings , will have to forego some of the comforts for the funds will be absorbed only at the lower interest rates. There is poetic justic in the end .

 

In view of above I don’t see markets in India suffering further losses. Albeit, commodities and raw materials will be costlier only. Oil price surge is digestible for India for it will make the manual effort of Indians  some what better rewarded. In India the farms are still tilled by hand or bullocks. In India the cycles and rickshaws are still in use. In Indian homes the domestic chores are still finished manually. It will not be big change for most Indians if the petroleum is priced higher or the energy is costlier. Haven’t we seen a stronger India after every oil shock over the past decades.

 

HariOm,

krsnaKhandelwal