1
India is latest boom to bust story (Jayati Ghosh in The Guardian) So now India is the latest casualty among emerging
economies. Over the past 10 days, the rupee has slid to its lowest-ever rate,
and the Indian economy may well be on the verge of a full-blown currency
crisis. In this febrile situation, it is open season for rumours and
pessimistic predictions, which then become self-fulfilling. This doesn't mean
that a crash is inevitable, but clearly it is possible. The real surprise in
all this is that investors and Indian policymakers are surprised. For some
reason, they apparently did not foresee this turn of events, even though the
story of every financial crisis of the past, and many in the very recent past,
should have caused some nostrils to twitch at least a year or two ago.
The Indian
economy has been in trouble for quite a while already, and only willful
blindness could have led to ignorance on this. Output growth has been
decelerating for several years, and private investment has fallen for 10
consecutive quarters. Industrial production has declined over the past year.
But consumer price inflation is still in double digits, providing all the
essential elements of stagflation (rising prices with slowing income growth).
The Indian economic boom was
based on a debt-driven consumption and investment spree that mainly relied on
short-term capital inflows. This generated asset booms in areas such as construction
and real estate, rather than in traded goods. We should know by now that such a
debt-driven bubble is an unsustainable process that must end in tears, but
those who pointed this out were derided as killjoys with no understanding of
India's potential. Something similar is occurring in a number of other Asian
economies that are also feeling the pain at present, such as Indonesia.
The current Indian problems may be extreme, but they reflect what should now be
a familiar process in all major regions of the world.
All bubbles must eventually burst. All it takes is some
change in perception for the entire process to unravel, and then it can unravel
very quickly. The trigger can be a change in global conditions, or a sharp
slowdown in domestic income growth, or political instability, or even economic
problems in a neighbouring country. The resulting financial crisis hits those
who did not really benefit so much from the boom, by affecting employment and
the incomes of workers.
This is
what has just started to happen in India, and is also likely to happen in
several other emerging markets. But essentially the same process has already
unfolded many times before in different parts of the world: Latin America in
the 1980s, Mexico in 1994-95, south-east Asia in 1997-98, Russia in 1999-2000,
Argentina in 2001-02, the US in 2008, Ireland and Greece in 2009, and so on. Why
are we so startled each time? And why do we never, ever, see it coming?
2 US to hit debt
ceiling in October (BBC) The
US Treasury Secretary Jack Lew has said that the country will reach its debt
limit by mid-October and called on Congress to act "as soon as
possible" to avoid such a situation. The
government will not be able to borrow if the limit is not raised. He warned
that in such a case it will be unable to meet obligations such as social
security payments, military salaries and Medicare reimbursements. The country's
borrowing limit is currently capped at $16.7tn.
"Extraordinary measures are projected to be
exhausted in the middle of October," Mr Lew said. "At that point, the
US will have reached the limit of its borrowing authority, and Treasury would
be left to fund the government with only the cash we have on hand on any given
day," he said. The cash balance at that time is forecast to be about
$50bn, which Mr Lew said, would be "insufficient to cover net expenditures
for an extended period of time". He said: "Operating the government
with no borrowing authority, and with only the cash on had on a given day,
would place the United States in an unacceptable position."
3 The
out-of-control Indian farm (MJ Akbar in Khaleej Times) If
the great Indian animal farm of 2013 seems out of control, it is because the
keepers have lost the map as well as the plot. The economy is only one
casualty of self-generated mayhem. The political stability of India is equally
a shambles.
The
recent behaviour of the UPA government has been utterly bizarre. The UPA, led
by Mrs Sonia Gandhi and her faithful lieutenant Digvijaya Singh, for reasons
that elude the comprehension of common sense, decided to kick up a massive
storm over Telangana. Inevitably, dust from this storm blinded the monsoon
session. Telangana has been on the anvil for four years; would another four
weeks have mattered? In fact, the prime minister could have made the
announcement on the floor of the House after the passage of food security; and
if the rest of the session was washed out at the least this bill would have
been home, high and dry.
Here
is a little more to perplex you. Why did government suddenly abandon its opaque
tactics of evasion and fudge over the missing coal scam files in the middle of
the session? These “missing” files first came to public attention when last May
CBI director Ranjit Sinha said publicly that he could not pursue investigations
because he had not received them. We all know why. Government is in deep
trouble over this colossal corruption. Its star industrialists in Parliament,
like Naveen Jindal and Vijay Darda, are involved. There is nothing mysterious
about the fact that files pertaining to these two are among those missing. It
seems to be a case of theft compounded by abetment.
All
careers, they say, end in futility — but only if you do not know when to quit.
Dr Singh will understand this analogy, since he likes America and American
businessmen. The share price of Microsoft just went up seven per cent after its
chief executive officer, Steve Ballmer, announced he was leaving. Ballmer was
once a hero of Microsoft, and an astonishing videotape shows him bouncing
across the stage at a company gathering, making cowboy noises, in the days when
he took the job as an untarnished superstar. How much will the share price of
India rise when the government of Dr Manmohan Singh quits?
4 Debt drags on China’s
growth (Tom Orlik in The Wall Street Journal) As worries over China's debt problem mount, the burden of
paying off those loans could be the trigger that tips runaway credit into
slower economic growth and financial stress. Nationwide, four-and-a-half years of breakneck growth in
lending has significantly increased China's debt burden. Outstanding borrowing
by businesses and households rose to 170% of gross domestic product at the end
of 2012 from 117% in 2008, according to data from the Bank for International
Settlements. The 2012 figure for the U.S. was 157%.
Assuming interest rates
of 6.9% on outstanding credit—the average in June—and repayment over the next
decade, interest and principal payments on business and household debt
currently absorb around a third of China's GDP. At the end of 2007, on the eve
of the financial crisis, the equivalent debt-service ratio for the U.S. was
21%, a figure that was broadly unchanged at the end of 2012, according to the
BIS.
China's central bank
appears little fazed, explaining that it takes a while before credit gets into
the economy, causing growth to pick up. Private analysts are less sanguine. The heavy debt load could also weigh on China's
efforts to tilt its economy away from heavy spending on infrastructure, often
paid for with borrowed money, and towards a rise in consumption.
5 Cartoon in Khaleej Times on emerging markets
meltdown:
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