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Nobody knows anything

One of the extraordinary things about the current downturn is that I have yet to meet anybody who can make sense of it for me — and that includes those hotshot economists who kept telling us that they had all the answers, writes Vir Sanghvi.

india Updated: Oct 19, 2008 01:20 IST
Vir Sanghvi

Are you as confused by the economic crisis as I am? My guess is that you are. One of the extraordinary things about the current downturn is that I have yet to meet anybody who can make sense of it for me — and that includes those hotshot economists and investment bankers who kept telling us that they had all the answers.

When we first heard about the crisis, it was in the context of the inability of US lenders to pay for their home mortgages (the so-called sub-prime crisis). We were assured then that while this posed some threat to US banks, the great private financial institutions that spanned the globe were essentially secure. There may be the odd year or so of losses but nobody was going under.

Then, this was revealed to not be true. One by one, the investment banks either teetered at the edge of bankruptcy or collapsed. Even then we were told that the Indian economy was strong and that while growth rates might drop by a half percent or so, we were fine.

Now we are warned that we are not so fine any longer. The Sensex has gone below the psychologically important 10,000 mark. The rupee is at a 20-year-low versus the dollar, having lost 19 per cent this year, the most in any year since 1991 (when it was effectively devalued). Industrial production is growing at only 4.9 per cent versus 9.6 per cent only two years ago. The trade deficit is at $63.17 billion (versus $12.6 billion in 2006) and the fiscal deficit is at Rs 1,16,890 crore (versus Rs 77,740 crore in 2006). According to our sister publication Mint, “the country, and by extension, its people, are worse off now than they were 28 months ago.”

Even the 9 per cent growth rate we were promised is no longer a possibility — we’ll be lucky to stay above 7 per cent. So, clearly all those guys who assured us that we had nothing to worry about were wrong. So were the experts who told us to buy stocks when the Sensex was at 15,000 arguing that it could only go up now. And so were the guys who told us that because the real economy was strong, we should expect no job losses in the non-financial sector — just talk to the staff of India’s private airlines who wonder if they’ll have jobs at this time next year or even whether the airlines themselves will survive.

Given that all the experts got it so wrong, are you surprised that lay people like you and me are utterly bewildered and confused?

In my case, these are my principal areas of concern.

The Market: It’s fashionable today to laugh at the fundamentalists of the Left as unreconstructed Stalinists who are so blinded by their faith in their dogma that they refuse to accept that the real world does not behave as Karl Marx expected it to.

My guess is that we should now also be laughing at the fundamentalists of the market, people who are so sold on the virtues of global capitalism that they fail to realise that reality has a way of closing their investment banks down and forcing them into unemployment.

Since the Reagan-Thatcher era of the 1980s, we have been told that the market has all the answers. India liberalised in 1991 but our policy-makers never quite embraced the market with the passion that free-marketers demanded of them. For years I’ve listened to lectures from bankers and economists about how our caution is costing us dearly; about how we need to allow fancy new financial instruments; about how Westerners would only invest if we changed our laws to make them more market-friendly; and how India should give the free market free rein and forget all this nonsense about social obligations and welfare measures.

What can I say to these experts now?

Perhaps something like: Hi guys! Hope you still have your jobs.

Clearly the market is not all it is cracked up to be. And we should also treat the market fundamentalists with the disdain we reserve for Stalinists.

Globalisation: Ten years ago, Rupert Murdoch said, “globalisation is another word for Americanisation.” (He thought this was an argument in its favour: how much difference a decade can make!)

Despite the high cost of globalisation in essentially poor countries (most notably in the Asian crisis of 1997), the United States and its institutions (a category in which I include the IMF) have continued to tell us that we must globalise the American way, make our currencies convertible, allow the West access to our markets, let their banks buy stock in our industry and generally, plug into the global economy.

The costs of globalisation to the poor and the weak have always been treated as collateral damage on the path to global progress. When things have gone wrong (as in Mexico for instance), we’ve been told not to worry; if Wall Street is involved then the US will bail the country out (as it did with Mexico).

That consensus must now be re-examined. One reason why our economy is in trouble today is because of global factors. And one reason why we haven’t collapsed yet is because we rejected the calls for total globalisation.

The Cult of Greed: One of the things that worried me most about the rising stock market was that it had fostered a cult of greed. Middle class people saw that their friends were putting their savings into the market and doubling them. In real estate, people began to believe that anything they bought would increase in value two to three times. So, they bought more than they could afford. Worse still, they began to lose respect for hard work, putting their faith in instant gains which required no work at all.

Those who invested in the stock market have learnt a painful lesson. The real estate market has not suffered as steep a fall but the decline has begun: it can’t be immune to the trend of the rest of the economy. A meltdown from these absurd prices is inevitable.

With a bit of luck, we’ll respect the old-fashioned values again. Over the last few years it had got to the stage where people set up companies that they knew would never turn a profit. They were advanced vast sums to do this by banks and funds who also knew that these companies would lose money. The trick: they would float on the stock market at ridiculous values and exit with piles of money.

Now, that scam is dead. And thank God for that.

The Government: Over the last 10 years, we have been told to see the government as an evil interloper, restraining the wizards of business and industry from creating wealth. Look at America, we've been told. The richest country in the world has a minimum of regulation.

And now, guess what? One of the reasons for this crisis we are told is that the US did not regulate enough. Investment banks were allowed to borrow $ 35 for every $1 they invested. Home lenders were allowed to lend money to people who had no way of repaying their loans.

When things have gone wrong, who do you suppose they have all turned to?

Why, the government, for a bail-out, of course.

Nobody wants a return to the pre-1991 license-permit-quota raj. But equally, let’s accept that the only defence that the ordinary citizen has against the greed of big business and big banking is some measure of regulation.

Ideally, government should arms-length the process by appointing autonomous regulators. But we cannot manage without some regulation.

The government must also intervene when things go wrong. For instance if the government does not provide a slew of concessions such as fuel credit and the like, all of India’s private airlines will close down in three months. Nobody wants that to happen — certainly not the public. So, some bail-outs are necessary and inevitable.

And finally: Screenwriter William Goldman used to say that the great truth of Hollywood was: nobody knows anything. Sure-fire hits turned out to be flops. Duds made millions. Nobody knew how to predict success, failure or the future.

Life can imitate art. So, take the slogan out of the movie business and apply it to the economy.

Because, here too: nobody knows anything.