India Economy: Effects of the US Financial Crisis in India

New Delhi, 30 Sep. It is often said that when the US sneezes the rest of the world catches a cold.
This three-part series looks at how India, China, and Russia have been affected by the US
financial crisis.

Before we get into detail about how much this US problem is spreading globally, we should
understand the severity of it and the possible consequences in the US. How sick is the US?

Some have compared the situation in the US with the Great Depression of 1929, but this
situation is far from a depression – in fact it’s not even a recession. In the Great Depression there
was no work and there was widespread poverty. People struggled through the winter with no
heating and no food. We are not seeing such extensive suffering in the US.

In the US, August 2008 unemployment figures were at 6.1%, according to the US Bureau of
Labor Statistics. In the Great Depression unemployment was higher than 25%. The Commerce
Department reported that GDP growth was at 2.8%, hardly indicative of a recession, although
this was revised down from the 3.3% figure it projected a month ago.

But one cannot ignore yesterday’s 777 point drop in the Dow Jones Industrial Average after the
$700 billion bailout plan failed to pass through Congress. These paper losses of more than a
trillion dollars may be the sneeze that disrupts global markets.

Even before this controversial rescue plan was shot down, Indian markets took a dive of their
own on Monday 29 September. The stock market sank to an 18-month low and the rupee a 5-
year low. The stock market dropped 5.3% to 12,595.75.

According to Business Standard, vice-president of Karvy Stockbroking Ambareesh Baliga, said,

“We are advising our clients to stay away from trading till selling by Foreign Institutional
Investors (FIIs) stops. Also, there is no support to the markets from any domestic institution.
While markets are below their fundamental levels, fear has gripped investors and there is panic
selling.”

While US investors and consumers are concerned about who will foot the bill for this $700
billion plan, to Indian and non-US markets that doesn’t matter. They just want it to happen so as
to restore confidence and of course liquidity.

Sify.com reported Jagannadham Thunuguntla, head of the Delhi-based SMC Group saying,
"The first major point of nervousness is that the US bailout plan will now be in three tranches of
$250 billion, then $100 billion and finally $350 billion and the second and third tranches will
require further Congressional approval. This means effectively, only $250 billion is now
available for buying troubled assets of banks instead of $700 billion outright. This doesn't really
solve the problem of liquidity."

Crowds gathered outside the Bombay Stock Exchange to watch the markets drop, with many
investors angry. Why should failure of the world’s most advanced financial system hurt
individual Indian investors? But the fact remains that the “Bush administration's failed economic
policies” as speaker of the House Nancy Pelosi described it, is everybody’s business.

Charles Cole, EconomyWatch.com