Before crying for a parallel bailout here in India, we need to consider the differences. In India private property developers are the ones in trouble from over-leveraging. And booming home loans were in the premium segments, and not in low-cost housing for sub-prime borrowers. So those that bought and those that built were mostly in the premium segment, paying black money as well to close the deals, and need no bailouts. They need to take their losses, reduce prices, and focus on the larger demand from the next rung that is still saving to own a home. What has ended in India is the large-scale expansion of glass, granite and opulence in the name of housing infrastructure. Also ended are the obscene margins from pandering to the fancies of the rich. There is little need for misplaced sympathies.
Avoid cut in petro prices
In an election year, it is tough to not announce populist policies. Cut in petro-product prices tops that list. Now that international crude prices have corrected and come at par with the administered price in India, the clamour for a price cut will only get louder. There are at least two reasons why prices should not be cut in a hurry. First, all through the run up, the oil marketing companies made huge losses, and government subsidies dented the fiscal deficit, apart from seriously weakening the balance sheets of oil marketing companies. If they did not get to charge market prices when crude prices shot up from $67 to $143 dollars, they should be allowed to reclaim some of the losses when prices have fallen. Second, the policy of protecting consumers from international crude prices has led to a complete inelasticity in demand for oil in India. While the rest of the world sought efficiency, cut back consumption, and reduced purchases, we were happily consuming more as we did not pay market prices. Our import bill and a weakening current account are mostly the result of unabated oil imports. A cut in petro-product prices will only worsen consumer behaviour.
The biggest surprise in the current crisis is the strength of the US dollar. For all the weakness in the economy, the currency is holding up, more due to the actions of exporting countries to manage their currencies and to stash away reserves in US dollars. The international strategy meeting of heads of governments scheduled for November 15th is likely to be crucial for the currency markets. While nothing dramatic such as taking away the dollars status as the international reserve currency is likely to happen, we need to see how exporting countries faced with a US recession plan to deal with their managed currencies.
Needed, a modicum of courage
Everyone agrees that interest rates should have been cut on October 24th and not in a blatant toe-the-line fashion a week later. But sadly, the finance ministry seems to be calling the shots on pricing of loans and deposits and is bullying not just the Reserve Bank of India (RBI), but also the banks. One is reminded of the courage of the legendary late Shri Talwar. As chairman of the largest bank State Bank of India he was asked to lend on favourable terms to Maruti, the favourite project of the then Prime Mininsters son. He stood up to the PM whom most in the country then feared, and told her that she had the authority to decide who the chairman of SBI would be, but had no authority over what such a chairman would do. When he was threatened that he may have to resign, he threw the gauntlet back and asked to be sacked instead, as he did not see the need to resign. If we really do have men of courage in banking and banking policy today, we need to see them speak for their banks and their shareholders, and not reduce themselves to becoming errand boys of the FM.