Crisis in Usa and Effects in India

Investment Bank Lehman Brothers, the 158 year old, fourth largest investment banker in the US declared bankruptcy after concerted efforts for a bailout failed. With total assets of $640 billion, this would be termed as the largest ever bankruptcy filing in history. Insurance company American International Group (AIG), America’s largest insurance company, received $85- billion as a rescue package from the federal authorities which staved off an impending collapse of the company. The bank of America is buying investment bank Merrill Lynch. All three of these companies at the centre of the storm have been damaged by the related mortgage and credit crisis and all three have lost much of their stock market value.
The potential fallout of the Lehman bankruptcy has had huge repercussions leading to a meltdown in major stock exchanges across the globe including India. The significant moves by the U.S. Govt. which included a $ 700 billion rescue fund along with hand holding measures from the private sector can be lauded as a timely intervention intended to mitigate the potential risks and disruptions caused to the world financial markets and would mean well towards working out a plan to cushion the world financial system.
Of particular concern in this issue is the abrupt weakening in the US labor market along with continued rapid decline in home prices which have eroded the main source of the average American's wealth and financial security and compromised their solvency. The acute stresses in the financial system (as underlined by the failure of several important regional and investment banks), and the perpetual volatility in the equity market, has resulted in an all time low in consumer confidence.
The question that most of us would want to ask at this point in time is that what would the long term implications of such a fallout be on the Indian financial system, given the fact that a few of our banks in India particularly the hi-tech ones in the private sector have exposure on equity, debt and interest rate swaps to Lehman India.
A re-look at India’s globalization policies and economic reforms adapted post 1991, which have envisaged accelerated growth, enhanced stability and strengthened the financial sectors can now lead us to believe that our trade and financial policies are fairly well integrated with the global economy. Secondly, India’s cautious approach towards opening up of the capital account (partially convertible at the moment) and viewing capital account liberalization as a process contingent upon certain preconditions has stood India in good stead in the sense that we stand well insulated from such financial debacles. The current global financial turmoil would most certainly see an exodus of Indian professionals scurrying back home seeking new avenues within the Indian markets, (popular acronyms like B2B…back to Bombay and B2C… back to Chennai, already saying it all) giving the local markets some brownie points.
Though the economic growth in India has slowed down from 9.6% in financial year 2006-07 to 8.7% last year (2007-08), perhaps due to impacts caused by recessionary trends in worlds markets, the appreciating rupee and inflation due to rising oil and commodity prices, the consumption, savings and investment patterns are still quite robust. Moreover, India’s huge infrastructure requirements will continue to envisage a further increase in both Govt. as well as private sector spending, increasing the stock of physical capital, increasing investment and consumption and would have a long term positive effect on the aggregate demand.
While analyzing the enormity of the situation from a global perspective, it becomes imperative to understand the market dynamics, exercise caution and enter the equity markets with a long-term view of three to five years. People who are risk averse may have a good option to invest in gold as it acts as a hedge against inflation. Infrastructure, Banking, Media and FMCG are areas which will continue to invite demand and may not be prone to interest rate fluctuations.
In the final analysis, India unfailingly continues its onward journey of growth in the midst of global financial uncertainties, showing its magnanimity and resolve to stand up to the rigors of both internal as well as external pressures and thrive on chaos.