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The three faces of the crisis, and how India survived

The meltdown has three key components, each affecting a certain set of economies. If India avoided a mauling, it was because it wasn’t a fit for any single set. See graphic

business Updated: Jun 11, 2009 23:29 IST

The meltdown has three key components, each affecting a certain set of economies. If India avoided a mauling, it was because it wasn’t a fit for any single set.


The financial crunch


WORLD: The US and the UK are part of a cluster which experienced a consumption boom paid for by the recycled capital surpluses of exporters like China and Japan. In addition, these countries, and centres like Hong Kong, made money off the financial services that moved this capital around. Before the bust, 40 per cent of US corporate profits came from finance. Combined with lax regulation, this consumption boom began creating asset bubbles, especially in real estate. The subprime loan was the epitome of a mix of poor rules and speculation.

INDIA: Indian capital markets are isolated and conservative so there was little subprime contamination. The biggest fallout: flight of foreign capital from stockmarkets and trouble for Indian firms that had borrowed overseas. The Sensex tanked, but steady remittances and FDI kept the capital boat afloat.

The export crunch

WORLD: The flip side of Anglo-Saxon overconsumption was the East Asian export addiction. China, Japan and countries like Germany converted their economies into giant cash-and-carry outlets. They experienced record growth, racked up forex reserves — and then went cold turkey when the rest of the world suddenly stopped buying. Their financial sectors, however, remained healthy. Exports represented as much as a fifth of the GDP of these countries. Many of them had also ignored domestic demand. The withdrawal symptoms: idle factories and ever-larger economic stimulus packages.

INDIA: Between a lack of reforms and strong domestic demand, India still has only 1% of world trade. Other than textiles, jewellery, handicrafts and software segments, the economy has only been mildly affected by drooping exports. Big job losses — but China’s have been 10 times more.

The Commodity Crunch

WORLD: When China exports and the US consumes, they suck up oil, iron ore, cotton and timber from around the world. Economies that sell raw materials that run both economies also boomed. Hence the extravaganza of the Persian Gulf, a false dawn in Russia and even prosperity in Africa. Oil nearly touched $150 a barrel, steel became a semi-precious metal and cooking oil a speculators’ target. This commodity spiral was the reason inflation spiked in much of the world. But when “Chimerica” stopped buying, all this surplus hubris evaporated.

INDIA: This part of the crisis was a godsend for India, a country where high-priced oil and other commodities had driven inflation into double-digits. But if there’s one reason the RBI is letting interest rates fall, it’s that the global commodities boom has tapered off.