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Quick Take
Has the government been dishonest about India’s exposure to the financial crisis?
17 Oct 2008
We asked... Manoj Vohra, India director (research), Economist Intelligence Unit; Ashvin Parekh, partner and national leader (global financial services), Ernst & Young; Sanju Verma, head-institutional business, HDFC Securities; B. Prasanna, MD and CEO, ICICI Securities Primary Dealership; Anita Gandhi, head-institutional business, Aryan Capital; B.K. Narula, chairman and managing director, Silver Smith India; Nitin Chaudhary, partner, Durga Ink; Sairee Chahal, director, Roving Writers; Neelabh, orthopaedic doctor, Kalra Hospital.
“The government overestimated the rupee’s resilience and reacted a tad late.”
Sanju Verma, Head-institutional business, HDFC Securities
“Direct exposure to global credit markets of India’s financial system is insignificant.”
B. Prasanna, MD and CEO, ICICI Securities Primary Dealership
"While some impact of tighter liquidity is inevitable, India is relatively resident."
Manoj Vohra, India Director (Research), Economist Intelligence Unit
YES BECAUSE: Several indicators point to the fact that the government’s early assurances may not be on the level. For one, even before what could be considered a reasonable amount of time spent assessing balance sheets, ministers and bureaucrats quickly proclaimed Indian banks to be “safe”. Then, just as the world’s central bank governors were to meet for the annual International Monetary Fund summit in Washington D.C., our own governor, Duvvuri Subbarao was asked to cut short his visit and return to India to address domestic issues on a war footing. Similarly, the finance minister and commerce minister were asked to cancel their proposed visits. The fact that a decision on reducing the cash reserve ratio came almost as soon as these entities met, implies that our leaders certainly had something to worry about.
NO BECAUSE: No doubt India will feel some impact from the global financial crisis — at least a slowdown in our GDP growth. Certainly, the stockmarket and foreign capital inflows, which have benefited from foreign capital all these years, will suffer from global risk aversion. However, the government widely acknowledges this. The question is whether India’s financial institutions were over exposed to the subprime mortgage-backed securities. The answer to that is ‘no’. One commentator estimates India’s mortgage-to-GDP ratio to be around 6 per cent as against 80 per cent in the US. So, while there will be short-to-medium-term challenges of accessing capital, this is largely because of a crisis of confidence and not because Indian banks are not sufficiently capitalised to lend or creditworthy to borrow.
MAYBE BECAUSE: Banks have made repeated assurances to customers (depositors) that they are sufficiently capitalised to withstand the shock of the global financial crisis. In that sense, the government did not lie about their position. However, investors are now having a crisis of confidence. Even mutual fund investors, who had thus far withstood the temptation to bail out, now seem to be calling in redemptions. This has prompted a Rs 20,000-crore helping hand targeted at mutual funds. Since this is more a case of paranoia, the government should work overtime to improve confidence. It should immediately examine the functioning of the real estate sector, which many analysts feel is an asset bubble just waiting to burst. Finally, the rules and penalties for credit rating agencies should be made much tougher.
(Businessworld Issue 21-27 Oct 2008) |
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