Global Financial Crisis & India: Leadership required

By Sucheta Dalal

Published at: http://www.suchetadalal.com/articles/display/3004/3007.article

on 11 Oct, 2008

India is in the middle of a financial meltdown and the extent of panic among finance companies, banks, corporates and investors is yet to be adequately reflected in the media. At a time like this, India needs bold economic leadership that is extremely credible and capable of quick decision-making to create confidence in the market.

Look around the world; policy decisions in the US are personally announced by President George W. Bush. In Britan it is the Prime Minister Gordon Brown who announced the policy package and faced media-gruelling with tact and equanimity. In France and Germany it is Nicholas Sarkozy and Angela Merkel who are leading the damage control effort.

In India, the situation is worsening by the day. Apart from a severe liquidity crunch that continues despite the cut in Cash Reserve Ratio (CRR), many finance companies are facing a crisis. There is also a massive run on Fixed Maturity Plans with corporate investors withdrawing investments and the credit ratings of the issuers also looking shaky. Some companies have begun to default on Certificates of Deposit (CDs) and are asking investors to roll over the CDs instead of increasing panic by announcing the default. The realty sector is among the worst hit. Clearly, the situation warrants quick, credible and intelligent steps to protect the financial sector, without necessarily bailing out reckless gamblers.

So, what do we have by way of prudent decising making? Believe it or not, every significant regulator or decision maker is either is new at his job or does not carry enough credibility in the financial world.

• Finance Secretary, Arun Ramanathan spoke to the press on Friday, 10th October, but he didn’t carry conviction with business and industry, especially those who know that he has just four months to retirement and is hardly likely to take decisions that may end up being controversial or may fail to work.
• Governor Dr. D Subbarao of the Reserve Bank of India (RBI) comes with a good reputation, but he is far too new at the job. More importantly, he and Deputy Governor Rakesh Mohan are abroad at a meeting. The RBI’s decision to cut CRR by 1.5% was also made overseas. In any case, since RBI operates out of an ivory tower, nobody is quite sure if it will initiate action aimed at mitigating potential damage to India’s financial system.
• SEBI Chairman C.B.Bhave is a veteran of the capital market, having been associated with it since the mid 1990s. He also comes with a good reputation. Unfortunately, Bhave has somewhat blotted his copy book with the meaningless flip-flop on Participatory Notes (PNs). The expectation that a change in policy that allows the issue of fresh, more non-transparent financial paper, would immediately boost market sentiment is so absurdly naïve that it does no credit to the Securities and Exchange Board of India (SEBI). Foreign Institutional Investors (FIIs) who bring in these funds are busy pulling their money out of the market. A little homework would have shown that there was already plenty of head-room to issue fresh PNs without changing the policy. Worse, it smacks of double standards regarding Know Your Customer (KYC) norms applicable to domestic investors and foreign ones. After the PN decision flopped, SEBI seems to have chosen to maintain a discreet silence about the market mayhem.
• Then there is Finance Minister P Chidambaram, who has never missed an opportunity to talk up the market and assure investors that the Indian economy is doing fine as reflected in the huge tax collections whipped out of business and industry. Unfortunately, he has said this so often that he carries little credibility among market players.

The only person, who carries credibility in the government today is Prime Minister Dr. Manmohan Singh. We need the Prime Minister to get into the thick of decision making and take charge of the situation at a time when some unprecedented action is required.

Lets go back in history to the Harshad Mehta scam of 1992. There is no Indian scam in 2008 (at least none that is evident), but it is worse. We have a global financial crisis that is bound to have a huge impact on the Indian economy. Let us compare the situtation with 1992 and how it was handled. Dr.Singh was the Finance Minister then and carried incredibly high credibility. More importantly, he had excellent support in and equally credible G.V.Ramakrishna at SEBI, who was unafraid of initiating quick action and the S.Venkitaraman at the RBI, who had excellent rapport with central banks around the world.

In his book, Two Score and Ten, Mr.Ramakrishna writes about how he persuaded a reluctant Dr.Manmohan Singh to make a statement in parliament and to set up a committee in the RBI to investigate the scam. The result was the multi-disciplinary Janakiraman Committee whose six reports and investigation formed the basis of the Joint Parliamentary Committee’s reports.

Well, there is a committee of sorts that has been set up by the RBI this time. Only time will tell if it is capable of assessing the situation on a continuous basis and come up with recommendations that will safeguard the finanical system without hurting tax payers interests by recommending panicky bailouts.

Email the author: suchetadalal@yahoo.com