Holding Fort

As the global financial crisis wages on, it brings threats unlike those predicted in the Mayan fables. Today, we live in difficult times, and 2012 has witnessed its shares of ups and downs. Economic crisis always brings with it political crisis as well, and both work in tandem to churn society and eventually give rise to newer forces and concepts.
Dr Amitayu Sen Gupta THE CRISIS IN EUROPE The crisis in the financial sector has spilled over into the real sector and assumed a form of a political crisis in Europe. The European Union, a concept that was yet being given shape, faces real chances of crumbling down. The Greek Debt problem continues, Spain took a 100 billion euro bailout package, and Ireland continues to simmer. The austerity measures being imposed as a solution to the crisis have failed to produce results. Government deficits have not really improved, and much of it today is due to fall in revenue earnings resulting, ironically, from fall in growth due to the austerity measures. The livelihood of the common man in Europe have never been this bad in the last two generations. The G20, which in the initial period of the crisis, lauded austerity measures as being a success, has shifted its tone and now talks about growth and employment. In a strong departure from its earlier position, it backs fiscal expenditures for countries if they can afford it, although the communiqu clearly reflects confusion and a lack of unanimity, as everyone is still confused about how to go about the problem. While the big guns of Europe like France, Germany, Italy, and Spain get highlighted in news, the state of the smaller and poorer East European countries is often swept under the carpet. East Europe today is facing major problems, with growth rates of zero - and in many cases negative. The Eastern European countries have for long been the production outhouse of their Western counterparts, and austerity-led fall in demand in the Western European economies is affecting the demand for their produce. As the austerity measures fail to resolve the crisis and instead bring on greater hardship for the common man in Europe, the anger spills out in political form. Two major global political events in Europe and indeed the world were the elections of France and Greece, where, in both cases, the people voted in a more socialist/left liberal forces in power. It is important to note that as EU economies, a powerhouse like France and one of the weakest - Greece - could not be any more different. However, the similarity in the election results show a clear trend that the common man in both countries is strongly rejecting the policy measures being imposed. Political turmoil exists today in almost all European countries. Most still debate the continuation of the EU and whether to break away from it, although from different points of view. While the poorer countries refuse to take the bitter pill of austerity, the better-off countries are worried about extending bailouts to the poorer ones which in turn affects the state of affairs of their own economy, given that they share a common market and currency. These political developments, however, have only added to the confusion as of now, and what path Europe will walk in the future with such fragmented political forces is now a bigger question. ACROSS THE ATLANTIC While Europe struggles to keep a united front, across the Atlantic, the United States of America too continues to struggle with the crisis. In this context, the US presidential elections, which by itself is one of the most important global issues given the clout the country wields, became all the more important. The clash between Republicans and Democrats was less between the two candidates Barak Obama and Mitt Romney and their personalities, but more about the economic philosophies they stood for. Obama had been backing stronger state expenditures, symbolised by his healthcare programme - dubbed Obamacare - while at the same time talking about raising taxes for the rich, another contentious issue that was debated the year round as a run up to the elections. Romney offered the exact opposites; reducing government expenditure, cutting down taxes, boosting bilateral trade agreements to bolster US exports, etc. That the people in the US chose the incumbent president shows that they clearly prefer the former policies compared

to the latter. Ironically, the US' election results are adding fuel to the political fire in Europe as discussed above, although the immediate issues are quite different across the Atlantic. THE ARAB SPRING The West Asian region has been witnessing political upheaval of its own since 2011, and this continued in 2012 as well. The crisis in Syria continues as the armed conflict that started in March 2011 still rages on. The struggle has taken a huge toll on the population, and the human crisis in Syria as a result of ongoing war is a global concern today. Already, Egypt Libya, and Yemen have witnessed regime changes, Bahrain saw flare-ups, and Syria is witnessing a bloody conflict. Lebanon, Algeria, Jordan, Kuwait, etc are some of the countries that have been affected by this Arab Spring that started in 2010 and continues to sweep across the region. West Asia has always been an area of great interest for the West, and the title Middle East by which it is more well known has great political implications, as it clearly reflects how Western viewpoint have so far dictated world politics (the region is 'Middle East' to the Western world, as every other region is to the East of it). The crisis in the West and its political weakening has allowed the people of West Asia to exert their will, and regimes that till now existed with tacit or direct support of the Western powers now face major threats from popular protest within. While the crisis in West Asia has a lot of internal sociopolitical dynamics behind it, there is no denying that in the macro sense, the weakening of the West in the field of geopolitics has allowed these uprisings to burst forth. The shift in geopolitics and its impact on West Asia perhaps best reflects in the oldest West Asian conflict; the Israel-Palestine problem. While the recent outbreak - violence in the form of Hamas bombing of Israeli territories, followed by a strong retaliation by Israel - was strongly condemned by the world, there was nothing new in this story. But a strong departure was witnessed this year when the UN General Assembly voted a with two-third majorities to formally give recognition to the state of Palestine and accord it nonmember observer status in the General Assembly. The official recognition of Palestine till date has been blocked by US at the behest of its ally Israel for ages, and the UN vote is a reflection of a slip in the world order today. THE ECONOMIC IMPACT OF CHINA IN ASIA It is a foregone conclusion that China has emerged as the strongest economy in the world today. It was considered so even before the crisis hit the Western Economies, and post crisis, China was predicted to replace US as the major economic force in the world. China itself has always downplayed such a development and has always seemed reluctant to take on the mantel of the leader. In economic terms, this suggested the Chinese currency renminbi as the most dominant currency overthrowing the US dollar, which till date, has been the international currency of exchange. The Chinese governments refusal to back such a development, and indeed its role in the global effort to boost the dollar, was seen as a let down by many. The reason behind the Chinese reaction was very clear; China holds much of its savings as US Treasury bonds and hence does not want to destabilise the US dollar. The other major reason was China does not want to allow full convertibility of its currency, a prerequisite for making it the global currency, which would entail allowing full capital account convertibility in its domestic economy as well. China continues to strictly control its currency, and is clearly in no mood to relax its strict position. However what even the Chinese government cannot prevent is the increasing usage of the renminbi as a reference currency in the global arena, a phenomenon that has greatly increased over the last few years. Reference currencies refers to the currency that other countries use to peg the value of their respective currencies in the international market of trade and exchanges. While China continues to denominate its currency in terms of the US dollar, more and more international currencies are today being unofficially pegged to the renminbi, although officially they might not be so. The East Asian region today is a renmimbi block, with seven out of the 10 economies tracking the renmimbi more closely than the US dollar. Moreover, with the euro falling as a reference currency given the economic turmoil in the region, the renmimbi in 2012 emerged as the second major tracked currency after the US dollar in the international arena. Not even Japan in its heyday managed to build a yen block, and the attempts to build a euro block died a premature death. The past year, therefore denotes a new high for the Chinese story, with the rise of renminbi finally marking itself as the most important economic development in the global arena of economics.

THE FACEBOOK IPO DEBACLE The current financial crisis has generated much debate on how the financial sector has been damaged by a lack of regulation and how the system today is so corrupt that it cannot be relied upon anymore. The discourse is really about how the financial sector has grown out of proportions to become such a big entity by itself that is threatens to disrupt the real economy. Thus, malpractice in the financial sector in one corner of the world today threatens to upset the whole economic ups and downs of the entire world. One of the prime examples that can be cited is the curious case of the Facebook IPO. This Facebook IPO was seen as the pinnacle of IT business, and was poised to revive much of the lost fanfare over IT stocks. As it turned out, it created history by emerging as one of the most controversial IPOs ever, and also as one of the worst debacles. On the opening hour, NADAQ faced a computer glitch for the first one hour, because of which tens of millions of dollars were misplaced. While many investment firms faced considerable losses, it was the retail investors who faced the biggest losses - of approximately $630 million. To make matters worse, there were widespread allegations of corruption, under-hand dealings, misrepresentation, etc.; more than 40 lawsuits were filed in the month following the IPO, with allegations against the lead underwriters Morgan Stanley for selective revealing of adjusted earnings to preferred clients - a business malpractice. What was supposed to be a crowning jewel in US technological prowess turned out to be one of the worst examples of the flaws of US capitalism. POLICY PARALYSIS One of the biggest problems in India during these times is what has been described as a policy paralysis on the part of the government. Even though we managed to avoid the initial impact of the financial crisis, the aftermath started slowly being felt over the years. Fall in overall global demand led to a slow fall in exports, and high inflation rates have been plaguing the economy for the last couple of years. However, the government, instead of directly addressing the concerns, chose to follow business as usual mode of operations. Eventually, the problems escalated with high inflation and the RBIs efforts to curb this via high interest rates leading to fall in both domestic demand and investments. This, in turn, has now started to affect Indias growth trajectory, with projections about the same falling day by day. It was expected that the government would take some proactive steps to address the issues by the start of 2012. However, there seems to be no progress. It all started with a rather lame budget in the month of March. There were hopes of some kind of respite from high inflation, low growth, looming unemployment and the other various troubles we have been facing. Industry bigwigs wanted speedier reforms, more easing of regulations and a general response to what they have been calling poor governance. The Finance Minister always has to do a fine balancing act in every budget trying to appease every section. This time, however, he managed to please none. Government expenditures were cut along with a rise in indirect taxes, leading to worsening of inflation and subsequent fall in domestic demands. This led to a greater slowdown in output, sending the growth trajectory haywire. Both government and international agencies have been revising growth projections so often that no one really believes anymore in them. To make matters worse, the budget provided very little incentive for raising manufacturing or for reviving export growth to fuel it in the wake of falling domestic demands. Increased allowance for FDI offers little comfort, as no investment will ever come in any sector unless there is sufficient demand for it. This is reflected by the idle cash reserves being held by major corporate houses, which is proving to be an additional burden for both the corporations and the banks. THE RBI-GOVT FACE-OFF One of the most curious cases that has developed over the last couple of years (but really hit the zenith in 2012) is the face-off between the government and the Reserve Bank of India on the issue of interest rates. The RBI insists on maintaining high interest rates in the wake of high inflation citing excess liquidity as its concern, and expects the government to address the problem of high inflation before it can lower interest rates. The government on the other hand blames the high interest rates as being a major impediment in the process of reviving growth and also lowering inflation, and has been asking the RBI to lower interest rates

so that government policies can be more fruitful. While a face-off between the central bank and the government in power in nothing new, the worst sufferers in the whole issue is the economy and the common man. In the wake of poor international demand in the exports market, the growth trajectory can only be bolstered by reviving domestic demand, or at least from preventing it from slipping further. However, for that, it is imperative that the problem of inflation and especially of food items as it is the most basic wage good should be controlled. While it is being argued that higher interest rates are preventing investments as the cost of investing is being driven up and leading to higher prices and inflation, it is also true that with current rates of inflation, domestic demand levels are low, which in turn act as a disincentive to invest. The problem, on the other hand, is that higher domestic demand would likely result in higher import bills that, if not countered by rise in export earnings, can lead to a further skewing of the trade balance leading to a currency crisis. While both the government and the RBI are well aware of this tricky situation, their approaches to dealing with it are from different viewpoints. There are elements of truth in both the arguments and issues have to be resolved according to their merits. The problem really lies in the form of growth trajectory that the government wants to follow. While the government is still keen in bringing in FDI and FII inflows, the inflows and their subsequent interest payment liabilities are a concern for the RBI which is trying to counter it with monetary policies in the form of higher interest rates. The question really is of fiscal and monetary policies being complementary to each other. However, the problem today is that fiscal policies in the wake of the ongoing global crisis is a much debated one, and the RBI is more concerned about taking countercyclical monetary policies to counter any possible financial crisis as a consequence of the fiscal developments in the economy. THE CURRENCY SCARE AND HIGH IMPORT BILL One of the major scares at the start of the year was an impending slide of the value of the rupee in the international market, triggered by oil companies servicing their payments in dollars. While this incident highlights the just concerns of the RBI, it also reflects the danger that the Indian economy faces today. Our economy is already facing problems of servicing foreign investments, and much of our foreign expenses are actually on servicing previous loans. Foreign debt servicing stems from incurred foreign debts, FII inflows, External Commercial Borrowings, and various other channels that make controlling the problem a rather complicated issue. One of the most talked about channels however are trade imports. Out of the major components of trade imports, the import of capital goods is essential for the growth of the economy, while import of gold is much of a leakage that is hard to prevent. Much is being talked about the third major component of imports; the most inelastic of all imports which is that of oil and petroleum products. While international oil prices have been going very high over the last year, the consequences were felt in the domestic economy as well. In the wake of such price fluctuations, the price of petrol was deregularised in India earlier. This year, it was announced that the subsidy on LPG would be reduced; limitations on the use of gas cylinders used for cooking in households were also announced. While attempts to cut down government subsidies or bring prices in tune with international prices have grave consequences vis--vis inflation, it also reflects the growing helplessness of the government in controlling import leakage in times of falling growth. This is a classic dilemma that any oil import dependent economy has to face. High growth requires higher oil products - leading to higher import bill. Any attempt to cut import bills by reducing oil consumption can lower levels of economic activity (directly or indirectly) and reduce economic growth. There is no clear cut solution to this puzzle and the government of India is still struggling with it. However, there is a limit up to which the rise in petroleum products can be passed on to the consumers, and the volatility of international prices of petroleum products means that it is very difficult to make any projections about the possible import bill. All this makes the issue of high import bill and subsequent implications for the value of the currency all the more complicated. ECONOMIC REFORMS The cut down in LPG subsidies was actually part of a reforms package that was announced by the

government to counter the charges of policy paralysis discussed before. The problem of political paralysis was not only being talked about by India, Inc, but also globally where international credit rating agencies had been lowering Indias ratings citing the same reasons. Following yet another round of cabinet reshuffling, the government came out with bold new plans that included, besides a cut in LPG subsidies; a rise by 14% on unbranded diesel prices, opening up to FDI (or in some cases, allowing higher percentage of the same) in domestic airlines, retail, media, etc. This was also accompanied by announcements in easing norms for External Commercial Borrowing, identifying a new category of Qualified Foreign Investors (essentially allowing High Net-worth Individuals to invest directly) and other such policies. The idea, however, still remains in wooing higher foreign investment to boost growth, which in turn, worsens the government RBI face-off situation. The most controversial of all these reforms has been the issue of allowing FDI in retail trade. Political equations were erased and redrawn and the recent Parliament session was mostly consumed in fighting over the issue. Although the government has managed to face a tough vote in the Parliament in favour of this position, the fallouts of the decision are yet to be realised. However, what is most disturbing is that the decision to allow FDI in retail has been taken keeping into considerations the boost it would provide to the foreign investment and its consequent impact in the share markets rather than the actual impact it would have on the domestic economy in the form of employment, wage income, prices, etc. Even if FDI in retail manages to reduce final consumer prices as is being promised by a long shot, the consequences in terms of employment loss (the argument boasts of doing away with middlemen, which is really saying that a lot of people will be losing their profession) may be a heavy price for the economy to pay, especially in a situation where unemployment continues to be a big challenge for a developing economy like India. SCAMS AND CORRUPTION Amidst the overall economic slowdown, a major issue plaguing India has been the series of scams and corruption that have continued to be reported even in 2012. While the whole process of economic liberalisation was ushered in to counter the issues of government failure and corruption, it seems the process has only escalated the levels of corruption to newer heights. As in the case of the financial crisis in the West, it is now being argued that even in India we are witnessing the worst form of crony capitalism, where the state colludes with certain powerful private entities for vested interests at the cost of the nation and the common man. Public ire on the issues of such scams usually takes a political turn as the only way to fight back is through a political process. The movements against corruption that rocked the country in 2011 have indeed today taken the shape of a new political outfit that seeks to fight it on those lines. However, the blocking of anticorruption legislation by the political establishment reflects the extent of the rot in the social system of India. In times of fiscal austerity, corruption adds fuel to public outrage that can only lead to escalation of the problem and disruptive consequences. To sum up, 2012 really has been a bad year economically and politically, both in the international arena and also within the country. The 2008 crisis is already drawing comparisons with the great depression of the early decades of the last century, and might well live on longer than that. While its impact on the developed countries is clear, the effect on developing countries is being slowly felt. India, as one of the top emerging economies, is not immune from the problem. However, we have our own share of domestic issues that were serious enough, and international woes have only added to it. It might be tough times ahead, but with every low we hit, we can look forward to the newer highs we can go up to. Bad times, like good times, are temporary and things are bound to improve sooner or later. We can hope that 2013 offers a shift to better times for the world economy and India in the process.