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BW Businessworld

Hope In Bad Times?

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I am writing this on Diwali Day. The coffee tastes good; early migratory birds are chirping away on the trees that hide our house from the lane; a soft autumn morning sun is playing hide-and-seek with leaves; the squirrels are out; and the construction workers are making unusually less noise on the mostly illegal multi-storied house that is coming up opposite ours. They have even deigned to re-arrange their sand, gravel, bricks and Tor steel bars so that we poor citizens get access to at least one half of the lane. Uncharacteristic to my economic views for most of this year, I am feeling mildly charitable — even optimistic.

Before explaining why this slight sense of hope, let me share with you some facts about globally troubled times. By the end of November, maybe early December, Greece will default for the third time. That is a given, and the global money markets have factored it in with the yield on 10-year Greek government bonds ruling at 23 per cent. The European Financial Stability Facility (EFSF) along with the European Central Bank (ECB) will have to bail out Greece yet again and start re-capitalising banks that hold large chunks of Greek sovereign debt. How much this will cost is anybody's guess.

However, a few things are certain. Even a parsimonious bailout package will cost a great deal. The only rescue package that might work for Greece is a huge write-down on its sovereign debt obligations. This requires massive re-capitalisation of some key European banks; and despite a commitment of e440 billion, the EFSF will be constrained by the divisive nature of politics and decision making in the European Commission to move fast enough. So, I believe that the rescue efforts will be neither timely nor decisive. Moreover, Greece will default yet again for the fourth time — because nobody will agree to a sufficiently large bailout with a huge write-down on Greek debt, and because the economy is in tatters.

Then there is an uncertain but increasingly probable outcome: the danger of an Italian meltdown. The tottering Silvio Berlusconi seems to be better at bunga-bunga parties than in running his country. This and the fact that he can't get his allies to back a tough pension reforms package, puts Italy in the centre of global bears' collective cross-hair. If that were to pass, it would be too much for either EFSF or the ECB to handle. Moreover, from November this year, we will have a new ECB president, Mario Draghi of Italy, and we don't know how he will deal with the impending crisis.

Comparatively, the US is better, but that doesn't say much. Its real GDP won't grow beyond 1.6 per cent in 2011. It has a non-farm unemployment rate running at above 9 per cent for the longest period since the Great Depression. The Republicans and Democrats are at daggers drawn, and nobody expects any fiscal reforms through the rest of US President Barack Obama's term. The positive is that it is at least one country with one currency, and the world still likes greenbacks more that it does the euro.

In such troubled times, why then am I optimistic about India? First, India will grow at 7.5 per cent to 7.6 per cent in 2011-12. That isn't as great as China growing by 9.1 per cent this quarter, but it is the next best in the world. Second, after 13 rate hikes which have seen the repo rate rise by 525 basis points, the Reserve Bank of India has finally said it will watch and wait. Hopefully, monetary bullheadedness is giving way to economic sanity at the 18th floor. Third, despite a rising interest rate regime in India, the second quarter results have been better than expected across various sectors. Corporates seem to be getting more efficient in squeezing capital; and some are even doing acquisitions and investments. Fourth, highways are getting back on track. The National Highways Authority of India is working again, and it can be seen on the ground. Yesterday, I was driving along an eight-lane section of the Hyderabad-Bangalore stretch of the NH-44.

It was impressive. Even in Uttar Pradesh, the Hapur-Moradabad section of NH-24, which was an utter nightmare till last year, is now a proper dual carriage.

Fifth, our banks remain strong, well capitalised and ready to lend. Sixth, and probably most important, some Cabinet ministers have got back into action. In the last month or so, I am noticing more positive initiatives on Raisina Hill than in the last 18 months. Maybe the powers-that-be have woken up and realised that we must kick-start long held up reforms.

Finally, it is Diwali. So grant a bearish agnostic like me the licence to pray for Lakshmi to enter our land.

The author is chairman of CERG Advisory.


(This story was published in Businessworld Issue Dated 07-11-2011)