The $700 billion history-making bailout package from the US government, which many had hoped would help end the turmoil in global financial markets, has failed. From Bangkok to London, stock markets across Asia and Europe went into free fall in early trading on Wednesday, tracking overnight losses on Wall Street, and Iceland was reportedly on the verge of bankruptcy.
Central banks have been pumping more and more money to ease liquidity in the system, but that’s not helping much. Around the globe, people are worried about safeguarding savings and keeping their jobs as pillars of international finance give way. In short, there is a crisis of confidence at the root what is being described as the worst financial crisis since the Great Depression.
The United States, where it all began with a housing bubble, has lost 760,000 jobs this year and its economy is headed for a recession — some argue it’s already gone into recession. People there are getting desperate as they lose jobs, go bankrupt and are forced out of their homes by foreclosure of their mortgages.
The bailout plan has failed because it doesn’t ensure that jobs and growth will soon return to the US. Also, it does not address all issues, including management and compensation practices on Wall Street, that drove irresponsible decisions and gave rise to the crisis. For instance, days after the US government offered $85 billion of taxpayers’ money to rescue
insurance major AIG, its executives reportedly blew up some $440,000 at a California beach resort on company account.
The crisis is fast spreading to Europe, and Asia, including India, is unlikely to be left behind. That being the case, what should authorities in India be doing? So far, we have seen much posturing and less action.
With foreign institutional investors in flight, the Indian stock market has already gone back to where it was two years ago. Earlier this week, market regulator Sebi lifted curbs on participatory notes — a popular instrument for foreigners looking to invest in Indian equities. There are other plans to dissuade foreign money from leaving Indian shores, but these would work to a limited extent.
We have to reinforce the ‘emerging India’ image that once lured the FIIs and other foreign investors. Things will not change overnight, and we will have to hold out for some time. But how we will hold out would make a difference. We need to keep a tight lid on inflation, while allowing for cuts in interest rates that are high and hurting investment and growth.
Governance will play a key role as this would require bringing more efficiency to our supply chain system, especially for goods consumed by the poorer population, and cutting back on wasteful expenditure.
Falling crude prices offer a window of opportunity for the Reserve Bank to go less hawkish on monetary policy. Currency management would also be crucial as a fast-depreciating rupee could undo much of the benefits of a weakening crude. There is a lot of new investment — about $700 billion — in the pipeline. There is an urgent need for our industry and government to evolve a plan to ensure these investments come to fruition.