Global markets have not been set on fire with the passage of the much-vaunted $700 billion bail-out package by the US Senate. US Treasury Secretary Hank Paulson’s proposal, which was sweetened with tax breaks for the middle-class, will probably be approved by the House this weekend. An earlier version was rejected due to widespread scepticism that it taxes many but benefits only a few — as was indicated in our editorial ‘Saving capitalism from the capitalists’. But there is a deeper reason why the market sentiment remains subdued the world over, including in India. The banking crisis is fast spreading from America to Europe whose economies have slid into recession. These jitters triggered a slide in the Sensex and the rupee and the mood is still bearish.
Bank failures just keep growing. After Washington Mutual, it was the turn of Wachovia Corp. The US Federal Deposit Insurance Corporation’s list of troubled US banks has, in fact, grown to 117. Meanwhile, across the Atlantic, the news was equally grim with three European governments rescuing the Belgian-Dutch group Fortis NV. Britain’s Bradford & Bingley was nationalised. France’s president Nicolas Sar-kozy recently made a passionate speech in which he vowed that the State would guarantee the security and continuity of the French banking and financial system. Chills in Europe, thus, have followed America’s seizures, resulting in the global stock market meltdown.
The big question is what impact with all of this have on the Indian economy? Although our banks have limited exposure to the US sub-prime mortgages and are better regulated, we cannot but be affected by these financial turmoils. “We live in an interdependent world and the fate of all countries is related to the international financial system,” stated Prime Minister Manmohan Singh. The biggest impact on us will be coping with the rigors of a global recession. This will affect our ability to grow as fast as we have of late. The disruption in financial flows, will, in turn, affect our ability to finance development.