Could India Go the Way of Greece and Italy?

[Skull and Bones]

Don't know about India, but China can definitely rescue me with couple of million dollars.

 

[Paan Singh]

Ok tell me who is going to bail out india then? i said only china because you are our neighbour and we dont want a war with india so we have no option but to get you back on track.

we have trillions in our black money accounts

 

[Drone(PREDATOR)]

Dont put your trust too much into IMF, did they bail out greece or italy?

But they are trying best to save pakistan from being bankacrupt

 

[rajnikant]

India might face hurdles and hiccups en route but its a juggernaut which will not stop in the foreseeable future !!!

So all the Chinese friends stop worrying about India and worry about side effects when revaluation of yuan happens !!That is when the real chinese economic problems will start to show

hey what does that mean? can you explain please?

 

[Kaniska]

Ok tell me who is going to bail out india then? i said only china because you are our neighbour and we dont want a war with india so we have no option but to get you back on track.

OMG....I never knew of realised that my chines friends are so concerned about us...BTW Did you bail our your best friend pakistan????..I beleive ...they need it now more than us...Let us know ...

 

[mjnaushad]

OMG....I never knew of realised that my chines friends are so concerned about us...BTW Did you bail our your best friend pakistan????..I beleive ...they need it now more than us...Let us know ...

From where Pakistan came into the topic..?????

 

[President Camacho]

So, per this passage, the main reason is inflation to bring down India's economy. If the contention held true even to the slightest degree, then with the artificially imposed high inflation rate China would be defunct already.

It is so hard for me to comprehend how they are commenting, within this small passage, on high inflation rate at one end and insinuating lower forex res. on the other.

A lower than phenomenal economic growth is always preferred, simply because it is less risky and more sustainable and keeps the workforce motivated.

But this one is the best:

The central bank has raised interest rates by 375 basis points since March 2010, driving up deposit rates and hurting profits.

This statement actually counters the central theme of the passage.

High deposit rates in the times of high inflation? Whatever be it, greater savings may lower profit rates but they always make the economy more immune to external factors. That is the reason the US economy rose so fast and so high, but shakes at the first signs of crumbling international markets.

If, rather than at 8%-10% India grows at 6%-7%, it would help the country much more, especially in narrowing the gap between the poor and the rich. Then again, the extreme diplomatic gains that India is enjoying, do bring in some setbacks as well.

 

[kingkobra]

From where Pakistan came into the topic..?????

tall claims such as china will bail out India makes mention of Pakistan relevant in this thread.

 

[Veeru]

Lol, we are 2nd fastest big economy growing at a rocket speed and some people are have wet dreams.

 

[Tshering22]

I think that's a wrong framing of sentence. More likely that we'd acquire Greek shipping industry technology in exchange for $$. We get the know how and they get profits. Honestly, If I were the PM, I'd actually approach Greek shipping industries to actually help us revamp our private shipping corporations, have chief Greek marine engineers train our engineers, establish dockyard masterplan for enhancement of shipping industry in India. This would mean an immediate boom in educational stream of marine engineering as the youth get more and more tech friendly.

This is the best opportunity that we can get and for obvious reasons, this terror-loving spineless UPA government is not using the opportunity. Would love to discuss this at great lengths though not on this thread.

 

[Loyus]

Dont put your trust too much into IMF, did they bail out greece or italy?

Italy and Greece are to be bailed out by a consortium of ECB and possibly IMF.. It is work in progress..

PS; I have a question for you .. Don;t take this personally ..It's totally academic
Do you understand macro-economics ?

 

[pmukherjee]

Good to know that China can be relied upon to help us or at least one Chinese friend thinks so. I am sure we will weather this one too. But yes, the govt had better get a handle on the inflation soon, otherwise they will be unemployed before long.

 

[Bharthi]

Indian Economy is not doing well for some time.This has lot to do with corruption in Govt.,Failing of the Govt machinery.This has caused Businesses to lose confidence in India.Adding with this the Euro crisis,Rupee is all time low as well as are all time high Inflation and Interest of the Central Bank.

But calling India Going Bankrupt is Ridiculous.

China and India used to grow at 15 and 9 percent.
China and India now grow at 9 and 7.5 percent.

 

[BJP*]

our economy is not driven by exports to rich people of developed world

still the base of our economy is agriculture and 70% population depends on agriculture.... do you think Indian farmer is concerned with the games going on world economy many of them do not know what is the job of reserve bank of India.

the base of Indian economy is the savings of middle income family not the big private corporates.
even opening post says Indian banking system is totally controlled by government of India

do chinese and americans know the benefits of mixed-economy, which India practices? I find it better than communists and capitalists. I rely on system and I am positive about it, hence being an Indian citizen i can assure there is no threat to Indian economy.

 

[ChinaToday]

Is the economy heading for a crash landing?

The concerns of Moody’s are somewhat exaggerated as most Indian banks are adequately capitalized and their level of bad assets, even though rising, isn’t alarming

Ratings agency bashing is a favourite pastime for many of us, which is why when Moody’s Investors Service last week downgraded the outlook for India’s banking system to negative from stable, citing concerns that global economic turmoil and a domestic slowdown may lead to loan defaults and curb profitability, there was a chorus of protests. A negative outlook is characterized by volatility and uncertain conditions. Senior bankers, economists and the government uniformly derided Moody’s action, dubbing it unwarranted and something that defied logic.

There was a collective sigh of relief when the next day another global rater, Standard and Poor’s, lifted the risk profile of the Indian banking industry by one notch, from 6 to 5, saying banking regulations in India are in line with international standards, and the banking regulator, the Reserve Bank of India (RBI), has a moderately successful track record. The agency’s country risk assessment is scored on a scale of 1 to 10, with 1 representing a lowest-risk banking system.

Apart from rising loan defaults, Moody’s is concerned about Indian banks’ ability to raise enough capital to support credit growth, and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market. The agency sees downward pressure on the banking industry’s ratings, although it has assigned a stable outlook to 14 of the 15 Indian banks it rates. Collectively, this pack accounts for two-thirds of the industry.

Earlier, in May 2009, in the wake of the global credit crisis following the collapse of US investment bank Lehman Brothers, Moody’s had threatened to downgrade 13 Indian banks on concerns about the government’s ability to support the banking system through capital infusion when the fiscal deficit is high. It did not take action then, but last month it downgraded India’s largest lender, State Bank of India​, for its rising bad assets and the lack of enough capital that can curb its ability to lend.

Indeed, the concerns of Moody’s are somewhat exaggerated as most Indian banks are adequately capitalized and their level of bad assets, even though rising, isn’t alarming as yet, but the banking system can’t remain insulated from the real economy and, hence, can’t escape the strains.

Crisis ahead?

There has been a dramatic deterioration on the macroeconomic front since the Indian central bank announced yet another rate hike in its October policy, its 13th hike since March 2010, to check persistently high inflation in the world’s second-fastest growing major economy after China.

There are telltale signs of a slowdown everywhere and many have started believing that the economy is heading for a crash landing.

India’s factory output expanded at 1.9% in September, the slowest in two years, against 6.1% in the year-ago period. In August, it had expanded at 3.6%, much lower than the consensus estimate and the 4.5% growth in August 2010, and worse than the upwardly revised 3.8% growth in July.

Cumulative growth in the first six months of fiscal 2012, between April and September, slowed to 5% against 8.2% in the same period last year. While manufacturing posted a paltry 2.1% growth year-on-year, its lowest since October 2009, capital goods output yet again turned negative (-6.8%). This is critical as it has direct correlation with investment spending.

The HSBC India Manufacturing Purchasing Managers’ Index (PMI) bounced back in October to 52 after dropping to 50.4 in September, its lowest since March 2009, but services PMI contracted for the second successive month at 49.1, after 49.8 in September, the first contraction since April 2009. A reading above 50 indicates expansion.

Among other slowdown signs, car sales fell for the fourth consecutive month in October, and the 23.77% decline is the sharpest monthly fall in almost 11 years. Indeed, disruptions in production schedules at the country’s largest car maker, Maruti Suzuki India Ltd, contributed to the fall in sales, but high interest rates and rising fuel prices also played a critical role. And if that’s not bad enough, slackening demand in developed markets widened the country’s trade deficit to a four-year high of $19.6 billion in October.

Growth in exports declined to 10.8%, continuing the trend that started in August, even as import growth remained steady at 21.7%.

The trade deficit in the first seven months of the current fiscal has been $93.7 billion, a level not seen in many years, and by the end of the year it may rise to as high as $150 billion, about 8% of India’s gross domestic product (GDP) on the budget estimate of growth. The current account deficit could be around 3% of GDP.

Adding to the gloom, indirect tax collections in October dropped 2.5% and gross direct tax collections slipped 0.61%. With demand slowing and corporate profitability being hurt, tax collections are likely to be affected further.

Around 2,150 listed firms that have announced their earnings so far have shown a close to 36% drop in net profit even though their sales have been up 22%. High interest cost is one of the contributing factors to the drop in net profit, and there will be no surprise if many of them fail to pay back bank loans. Gross bad debts of listed banks have crossed Rs. 1 trillion in September, 33% higher than a year ago, and will rise further as many of the restructured loans will turn bad.

Widening fiscal deficit?

Lower tax collection is not good news for the government as it will not be able to keep the fiscal deficit target at 4.6% outlined in the budget. The government has already raised its market borrowing programme in the second half by Rs. 52,872 crore, making this year’s borrowing a record high (Rs. 4.7 trillion), but the reason behind the rise in market borrowing, we were told, was lower collections from small savings. If indeed the fiscal deficit overshoots the target, the government will have to borrow even more. This has a direct bearing on the investment cycle as it will push up interest rates and crowd out private investments.

The benchmark 10-year bond yield on Friday touched a 39-month high of 9%, and government bond auctions have been devolving on primary dealers as banks do not have enough appetite for sovereign papers when liquidity is tight. They borrowed Rs. 1.27 trillion from RBI on Friday and the daily average cash deficit in the banking system in the past week was in the range of Rs. 80,000-85,000 crore.

For RBI (and, of course, for the government), it’s time to worry about growth even though inflation continues to be high and may not drop to 7% by the year-end, as projected by RBI, with oil prices going up. One of the key assumptions of RBI behind pegging wholesale price inflation at 7% by March is a bearish outlook on oil prices. Besides, a falling rupee will also put pressure on inflation as the import of goods will become costlier in rupee terms. The Indian currency has breached the 50 mark against the dollar and is trading at a 30-month low. Inflation has remained persistently above 9% for 10 months in a row and at least 8% for the past 21 months.

RBI will not be in a hurry to reverse its monetary policy stance and start cutting rates soon, but it may have to find ways to infuse liquidity in the system, possibly through bond sales, as otherwise the government will find it difficult to raise money from the market and there will be no money for firms to borrow.

We are close to a crisis and the best thing the government can do at this juncture is push for some reforms and stir foreign investors’ imagination. This can be done, for instance, by raising the foreign direct investment limit in insurance and opening up the retail sector. A cut in expenditure is ideal to contain fiscal deficit at the targeted level, but if that’s too difficult, the government can raise excise duty—which was sharply cut in 2009—even at the risk of adding to inflation. It can also bring down its stake in public sector banks, from 51% to say 33%, to help banks raise money from the market.

What’s the point in raising the fiscal deficit further to infuse capital in banks and maintain its status as the majority stakeholder when a 26% stake gives a shareholder powers to block any special resolutions and even a so-called golden share can help the government control the banks? Smart administrators see opportunities in a crisis.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as a deputy managing editor of Mint. Please email your comments to bankerstrust@livemint.com

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