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Amitava Chattopadhyay

Amitava Chattopadhyay
Emerging Market Multinationals - Amitava Chattopadhyay


A not so obvious but significant consequence of the US government failing to reach an agreement on debt ceiling!

The US government could not come to an agreement leading to a shutdown in many non-essential services, including the processing of passports and visas! Indeed, if by October 17th there is no agreement, things get worse and the US government could default on debt payment.

This has huge potential consequences that may not be obvious at first glance. One key advantage that the US currently enjoys is that the US$ is the reserve currency of choice. This confers benefits to the tune of US$100 billion to the US government and its citizens in terms of lowered borrowing costs.

This may not disappear with a debt default as currently there is no other currency available to fill the reserve currency shoes. However, it is likely to lead to a speedier erosion of the might of the US$ as a reserve currency and thus a quicker increase in the cost of debt for the US government and its consumers.

Call me paranoid!

It seems that notwithstanding what the media has been saying about India, international investors in India remain reasonably committed. According to the Financial Times, only $900 million of the roughly $200 billion of foreign investments in India’s stock market have been withdrawn by the investors following the recent slowdown. Perhaps these investors are more open to the reality of India as opposed to what I see as scare mongering by the global media.

Why do I think it is scare mongering by the international media? First, there are some very well managed businesses in India and they will likely ride out the current situation successfully. Second, as I noted in an earlier musing, this is not 1991 all over again. There is a policy paralysis at the moment but elections are due in May 2014, and things are likely to change as there is likely to be change in the political landscape, notwithstanding the specific coalition that comes in to power. There is also a new leadership at the Reserve Bank of India, India’s central bank, which is likely to lead to a more aggressive and pragmatic decision making there. Collectively, there is a decent chance that the macroeconomic conditions in India will improve in the coming financial year.

Call me paranoid but, given the above, it seems to me that most benevolently, one can call the international media as sensationalist and seeking to sell more eyeballs with dramatic headlines. At worst, it is a concerted effort to undermine large emerging markets like India through manipulating public opinion globally, as it would be a danger to the cozy new post-colonial world order that has been established by the developed countries, if the larger emerging economies were to continue with their growth story and succeed. That would shift the center of gravity more decisively to the “South”, marginalizing all but the largest of the developed economies in the immediately foreseeable future. That would not do, would it?

Is this 1991 all over again?

During the past several weeks the global financial press has been rife with news of the decline in economic growth and tumbling currency exchange rates in India–recent economic growth numbers showed the economy to be growing at a dismal 4.4% and the Indian Rupee has dropped more than 20% against the US$ since the beginning of this year. Some have raised the specter of a repeat of the economic crisis of 1991.

While there is no doubt that the economic numbers coming from India are gloomy, its growth rate is still the fourth best in the world and the situation is by no means as bad as it was in 1991. First, since 1991 policy makers have learned a great deal about how to manage a free-market economy. Second, an aggressive reform agenda could easily turn the story around. The government needs to push through investments in infrastructure in partnership with the private sector. It needs to implement reforms in labor laws and governance, as some relatively low hanging fruit. Third it needs to disinvest in losing propositions like Air India, rather than repeatedly shoring up a dysfunctional organization with tax payer money, money that could be better used elsewhere. Last but not least, it needs to stop pandering to the needs of the upcoming elections in 2014, and move ahead for the upliftment of the citizenry.

The main question is, will the current government take the bull by the horns and do what it needs to do, or will it sink to pandering to vote banks and leave more than half a billion people, to and for whom they are responsible, to continue to suffer the indignity of abject poverty?

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