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; squirrels are out; and the
construction workers are making unusually less noise
on the mostly illegal multi-storied house that is
going 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’s 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 bailout 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 €440 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 and doing it eight times a night
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. Finally, 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 President
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 relatively
optimistic about India? Here are some facts. 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 UP, 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’m noticing more positive
initiatives on Raisina Hill than 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.
Published: Business World, November 2011