economic collapse scenarios for 2011 - draft

7/31/2019 Economic Collapse Scenarios for 2011 - Draft

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Economic Collapse Scenarios for 2011

What could cause an economic collapse in 2011? Well, unfortunately there are quite a few nightmarescenarios that could plunge the entire globe into another massivefinancial crisis. The United States, Japan andmost of the nations in Europe are absolutely drowning in debt. TheFederal Reservecontinues to play recklessgames with the U.S. dollar. Theprice of oilis skyrocketing and the globalprice of foodjust hit a new record

high. Food riots are already breaking out all over the world. Meanwhile, the rampant fraud and corruptiongoing on in world financial markets is starting to be exposed and the whole house of cards could come crashingdown at any time. Most Americans have no idea that a horrific economic collapse could happen at literally anytime. There is no way that all of this debt and all of this financial corruption is sustainable. At some point weare going to reach a moment of total system failure.

So will it be soon? Lets hope not. Lets certainly hope that it does not happen in 2011. Many of us need moretime to prepare. Most of our families and friends need more time to prepare. Once this thing implodes thereisnt going to be an opportunity to have a do over. We simply will not be able to put the toothpaste back intothe tube again.

So we had all better be getting prepared for hard times. The following are 12 economic collapse scenarios thatwe could potentially see in 2011.

#1 U.S. debt could become a massive crisis at any moment. China is saying all of the right things at themoment, but many analysts are openly worried about what could happen if Chinasuddenly decides to startdumpingall of the U.S. debt that they have accumulated. Right now about the only thing keeping U.S.government finances going is the ability to borrow gigantic amounts of money at extremely low interest rates. Ifanything upsets that paradigm, it could potentially have enormous consequences for the entire world financialsystem.

#2Speaking of threats to the global financial system, it turns out that quantitative easing 2 has had the exactopposite effect that Ben Bernanke planned for it to have. Bernanke insisted that the main goal of QE2 was tolower interest rates, but instead all it has done is cause interest ratesto go up substantially. If Bernanke thisincompetent or is he trying to mess everything up on purpose?

#3 Thedebt bubblethat the entireglobal economyis based on could burst at any time and throw the wholeplanet into chaos. According to a new report from the World Economic Forum, the total amount of credit inthe world increased from $57 trillion in 2000 to $109 trillion in 2009. The WEF says that now the world isgoing to need another $100 trillion in credit to support projected economicgrowth over the next decade. So isthis how the new global economy works? We just keep doubling the total amount of debt every decade?

#4 As the U.S. government and the Federal Reserve continue to pump massive amounts of new dollars into thesystem, the floor could fall out from underneath the U.S. dollar at any time. The truth is that we are alreadystarting to see inflation really accelerate and everyone pretty much acknowledges that official U.S. governmentsfigures for inflation are an absolute joke. According to one new study, the cost of college tuition has risen286% over the last 20 years, and the cost of hospital, nursing-home and adult-day-care services rose 269%during those same two decades. All of this happened during a period of supposedly low inflation. So whatare price increases going to look like when we actually have high inflation?

#5 One of the primary drivers of global inflation during 2011 could be the price of oil. A large number ofeconomists are now projecting that the price of oil could surgewell past $100 dollars a barrelin 2011. If thathappens, it is going to put significant pressure on the price of almost everything else in the entire globaleconomy. In fact,as I have explained previously, the higher the price of oil goes, the faster the U.S. economywill decline.

#6Food inflationis already so bad in some areas of the globe that it is setting off massivefood riotsin nationssuch as Tunisia and Algeria. In fact, there have been reports of people setting themselves on fireall over theMiddle Eastas a way to draw attention to how desperate they are. So what is going to happen ifglobalfood pricesgo up another 10 or 20 percent and food riots spread literally all over the globe during 2011?

#7 There arepersistent rumorsthat simplywill not go awayof massive physical gold and silver shortages.Demand for precious metals has never been higher. So what is going to happen when many investors begin toabsolutely insist on physical delivery of their precious metals? What is going to happen when the fact that far,
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far, far more paper gold and paper silver has been sold than has ever actually physically existed in thehistory of the planet starts to come out? What would that do to the price of gold and silver?

#8 The U.S. housing industry could plunge the U.S. economy into another recession at any time. The real estatemarket is absolutely flooded with homes and virtually nobody is buying. This massive oversupply of homesmeans that the construction of new homes has fallen off a cliff. In 2010,only 703,000single family, multi-

family and manufactured homes were completed. This was a new record low, and it was down 17% from theprevious all-time record which had just been set in 2009.

#9 A combination of extreme weather and disease could make this an absolutely brutal year for U.S. farmers.This winter we have already seen thousands of new cold weather and snowfall records set across the UnitedStates. Now there is some very disturbing news emerging out of Florida of anincurable bacteriathat isravaging citrus crops all over Florida. Is there a reason why so many bad things are happening all of a sudden?

#10The municipal bond crisis could go supernova at any time. Already, investors are bailing out of bonds ata frightening pace. State and local government debt is now sitting at an all-time high of22 percentof U.S.GDP. According to Meredith Whitney, the municipal bond crisis that we are facing is a gigantic threat to ourfinancial system.

It has tentacles as wide as anything Ive seen. I think next to housing this is the single most important issue inthe United States and certainly the largest threat to the U.S. economy.

Former Los Angeles mayor Richard Riordan is convinced that things are so bad that literally 90% of our statesand cities could go bankrupt over the next five years.

#11 Of course on top of everything else, the quadrillion dollar derivatives bubble could burst at any time. Rightnow we are watching the greatestfinancial casinoin the history of the globe spin around and around andaround and everyone is hoping that at some point it doesnt stop. Today, most money on Wall Street is notmade by investing in good business ideas. Rather, most money on Wall Street is now made by making the bestbets. Unfortunately, at some point the casino is going to come crashing down and the game will be over.

#12 The biggest wildcard of all is war. The Korean peninsula came closer to war in 2010 than it had indecades. The Middle East could literally explode at any time. We live in a world where a single weapon cantake out an entire city in an instant. All it would take is a mid-size war or a couple of weapons of massdestruction to throw the entire global economy into absolute turmoil.

Once again, let us hope that none of these economic collapse scenarios happens in 2011.

However, we have got to realize that we cant keep dodging these bullets forever.

As bad as 2010 was, the truth is that it went about as good as any of us could have hoped. Things are still prettystable and times are still pretty good right now.

But instead of using these times to party, we should be using them to prepare.

A really, really vicious economic storm is coming and it is going to be a complete and total nightmare. Getready, hold on tight, and say your prayers.

How did the us economy fall into a financial crisis?

The current U.S. economy has fallen and people are wondering how this happened and what causedthe economy to fall. One reason the U.S. economy is unstable is because of greed. Banks became too greedy andgave loans to people that couldn't afford them. And consumers became too greedy and bought homes, cars and

things on credit cards they couldn't afford.
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As a result of this, the stock market is unstable. And the financial news is causing it to increase or decreasewhenever something good or bad happens. Several banks are filing for bankruptcy and some banks are beingbought by other companies so they can avoid bankruptcy.

One of the main industries that is being affected by the current economy is the real estate industry. So manyhome buyers were given a chance to own a home through the subprime loans. These loans gave people the false

impression that they could afford a home that was out of their price range. But as soon as the rates and paymentsfor the loans increased, these owners began to see that it was a bad idea to have a subprime mortgage. Manyhomeowners have lost their homes because of this. The subprime loans are one the reasons why so many homeshave gone into foreclosure.

Another example of people being greedy in the real estate industry is the home builders. Beforethe housing market declined, home builders were building so many homes and believed they could make a profitfrom every home they built. When the housing market declined, home builders realized they built too manyhomes and they were going to have a hard time selling them. The current economy has forced home builders tocut the prices of their homes and lose profits.

The car industry is another example of an industry that has also been greedy. Several car manufacturers, mainlythe U.S. automakers, have ignored the idea of making more fuel efficient cars and have continued to make gas

guzzling vehicles. Because of the wrong choices they have made the U.S automakers are losing money.

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The housing crash, however, did not happen overnight. A number of factors contributed to the housing crashresulting extensive foreclosures and plummeting housing prices to their all time low. One of the main cause forthe housing crash lies in the fact that banks and financial institutions were lending mortgages at 5 to 10 times theannual incomes of people, which was way above the safe value of 3 to 4 times. These financial powerhousesused aggressive terms and conditions but did very little scrutiny while providing mortgages. This led to an easycash flow in the market which fueled the housing prices as well. The US economic meltdown also played amajor role in the housing market crash world over. Foreign investors who had invested in the real estate marketin US had to declare bankruptcy owing to massive loss. The housing crash is expected to cost the bankingsystem a whooping $2 trillion dollars.

Readmore:http://wiki.answers.com/Q/How_did_the_us_economy_fall_into_a_financial_crisis#ixzz1UdnFUl00

What caused America's economic collapse?May 2, 2011. Wall Street. With the collapse of the United States economy still in its beginning phases, most

Americans are content with being in denial. To be fair, nobody really knows just how bad Americas economic

collapse is going to be. Unfortunately, our Democratic and Republican elected officials, together with the

national press, have done an incredible job convincing the American People that the worst is behind us and

were actually in the middle of a recovery.

Other opinions are much more shocking. One such conclusion suggests that during the chaos of the economic

meltdown, the government of the United States of America was overthrown. It wasnt a military or political

coup like in most countries. It was an economic coup. That may sound like a wild conspiracy theory or an

overly dramatic exaggeration. Well leave that for the reader to decide.

We know you probably dont care now, thanks to genius marketing. But very soon, youwillcare. And youll be

asking the same questions as all your other friends, family and neighborsHow did this happen? When did this

happen? Whos responsible for this? Why didnt anyone tell me?
http://wiki.answers.com/Q/How_did_the_us_economy_fall_into_a_financial_crisis#ixzz1UdnFUl00http://wiki.answers.com/Q/How_did_the_us_economy_fall_into_a_financial_crisis#ixzz1UdnFUl00http://wiki.answers.com/Q/How_did_the_us_economy_fall_into_a_financial_crisis#ixzz1UdnFUl00http://wiki.answers.com/Q/How_did_the_us_economy_fall_into_a_financial_crisis#ixzz1UdnFUl00


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Theres a reason nobody, including Bush, Obama and Greenspan, understands what happened, or how to fix it.

Thats exactly how it was designed by the super-rich and super-elite on Wall Street and in Washington D.C.

After years of research and reading documented accounts and testimony from the individuals that were a part of

the Economic Coup, or helplessly witnessed it first-hand, we have put together this step-by-step account of how

YOU, the American People, gave away your freedom, your liberty, your possessions, your country and your

childrens and grandchildrens futures.

Believe it or not, the Housing Meltdown and the Economic Meltdown were two completely separate things.

Their only connection is that the Housing Meltdown created the opportunity and setting for the Economic

Meltdown. But on the way to the bank, something sinister happened. With a Republican ally in the White

House, the worlds super-rich and super-elite, My base as George Bush affectionately called them, and the

shadow government as referred to by others, enlisted Hank Paulson to carry out their instructions.

But how? When? Who? History will debate those questions forever. Based on numerous first-hand accounts

however, here is the best summary we could put together with the ever-increasing confessions of those who

were involved. Some only now realize they took part. And the worst offenders of all were the American People

who let it happen without ever giving it a second thought, or a first thought in most cases.

It all started with Americas Housing Bubble. See our separate account ofAmerica's Housing Meltdownfor

more specific information on that. For the purposes of explaining the Economic Meltdown, well just pick up

where the Housing Meltdown left off. For thats exactly how it happened. International financiers, aka the

worlds super-rich, had gone from net worths of tens of millions of dollars to hundreds of millions thanks to the

ignorance of the American People and the corruption of the Republican and Democratic Party representatives

responsible for monitoring Fannie Mae and Freddie Mac.

When America ran out of credit-worthy people to buy homes or take out a third mortgage or home equity loan,

the once-booming housing market that produced mega-profits for small banks, mortgage originators, real estate

companies, investment banks and hedge funds began to fizzle out. Addicted to guaranteed profits on their

wagers thanks to the U.S. taxpayers guarantee on all Freddie and Fannie mortgages, the worlds banks and

super-rich concocted a scheme to keep the record profits coming in.

Thanks to behind the scenes actions by Americas investment banks, overnight, small, local banks andsmall mortgage originating companies began giving out huge loans to anyone who applied, regardless of

whether or not they had any income, a heartbeat or even human DNA. Both the local banks and mortgage

originators knew these borrowers were frauds and sure to default on their loans. And the ones that were

legitimate borrowers pursuing the American dream were victims anyway. The loans were bogus and doomed to

fail. Not only because of astronomical interest rates and unachievable balloon payments, but also because of

hundreds of pages of fraudulent, undecipherable, fine print that protected everyone but the borrower and the

U.S. taxpayer. But nobody cared. Millions of Americans were sick of being homeless and desperate for a home

of their own. And the banks knew the U.S. taxpayer was guaranteeing every one of these bogus loans. The fees

from originating them were too enticing to ignore.

The investment banks also knew the loans were bogus and never going to be paid back. But they bought them

anyway. Why? Why would anyone pay a fortune for something they know to be worthless? Because they hadalready bribed at least two of the nations three ratings agencies (the three being Moodys, Standard & Poors

and Fitch), with inflated fees, to rate worthless garbage as AAA. By rating them AAA, not only would the

unknowing American People buy them, but they could also resell the AAA rated garbage to investors all over

the worldpension and retirement funds, unions, mutual funds, hedge funds and private investors like you and

me. The best part about these sub-prime mortgages was that the interest rates were astronomical, the fees were

outrageous and all of that was hidden in pages and pages of fine print. The return on investment for the worlds

super-rich was better than any other investment on Earth. Thats why the Housing Bubble kept expanding it

was a huge profit with no risk. The American People guaranteed every bet.

Even regular Americans began taking part. Homes multiplied with two or three home equity loans and midnight

infomercials taught people with no credit and no money down to get rich buying and quickly reselling homes.

But that still wasnt enough for the investment banks. Thats when the money-stealing scheme gets really

sinister. Unbelievably, the Grand Scheme can be traced directly back to a half dozen criminal minds,

including those behind Michael Milken and his evil empire of junk bonds. Being white collar criminals,
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these men had served their short time in a country club prison and were now free to rip off the world once again.

Having gone their separate ways, they each individually found themselves working in the new products

divisions of the worlds largest investment banks.

It was at these 4 or 5 desks that the scam to defraud the world was simultaneously created, possibly without a

conspiracy and by only an amazing coincidence. Admittedly, the supervisors, corporate executives, risk

managers, board members and stock holdersdidnt understand the financial atom bombs that they werecreating, and now defrauding the world withall in the name of great American Capitalism and the Free

Market system.

If the geniuses at JP Morgan, Goldman Sachs, Merrill Lynch, Bear Sterns and Lehman Brothers didnt

understand what they themselves had created, and everyone from Alan Greenspan, the SEC and the ratings

agencies that rated them all AAA didnt understand what they were looking at how, you wonder, are we going

to not only understand it, but explain it to the American People? Well, unlike all the above people and

institutions, we werent the perpetrators of the crime and have no problem calling it like we see it. Also, were

regular Americans, we speak the American Peoples language. With the above people and institutions being the

who, lets take a look at the why and how.

The why is simple greed. The how is a little more difficult to follow. So, stay with us here:

Home Loans - When the profits on legitimate mortgages maxed out and the profits on fraudulent mortgages also

maxed out, they simply ran out of houses to mortgage and double-mortgage. Thats when the above half dozen

individuals and institutions came up with the brilliant idea of creating non-existent, fake houses and mortgages.

Basically, they were all the same thingderivatives. These half dozen institutions literally opened up casinos

and they were the dealer, unable to win or lose, only profit on the buying and selling of securities that didnt

even exist. They were derived from actual home mortgages, but only in name. Thanks to the fantasyland

created with deregulation, the investment banks opened their casinos and replaced roulette, black jack and slot

machines with Credit Default Swaps, Credit Default Obligations and Synthetic Mortgages.

Unlike the legitimate odds of a regulated casino, the SEC allowed the investment banks to create games with

100 to 1 odds, 500 to 1 odds and even 1 million to 1 odds. Playing the role of middle-man again, the investment

banks didnt care who won or lost or whether the mortgages were defaulted on or not. They got rich from thefees they charged to play the game. There was one catch howeverthese werent mortgages and therefore not

backed by Fannie, Freddie and the U.S. taxpayer. They were simply fictitious funds that were derived from

other fictitious funds that were derived from even more fictitious funds that were derived from the

original list of mortgages sitting on the desks of those half dozen investment banks and the former

Michael Milken managers. By throwing a thousand mortgages into a pool, mixing them all up and then selling

shares to investors, the investment banks now had a mysterious base of trackable securities to create all the

other derivatives from. When the original mortgages were paid in full or defaulted, it trickled down to the casino

where investors won or lost their bets. It seemed simple enough.

But without Fannie and Freddie taking the positive side of the bet, the investment banks needed someone to

replace the U.S. Taxpayer. They found it in the worlds hedge funds. At first, the bet was simple. The odds were

100 to 1 that the mortgages would default. After all, thanks to the many regulations that used to be in place, theAmerican homeowner was the most dependable borrower on Earth. Rarely, if ever, did they default on their

home mortgages. Through Americas recent history, 1 in 100 defaulted in good times and 1 in 50 in bad times.

And the investment banks who created this game didnt care either way. They got rich on each wager no matter

who won or lost.

That was early on. Now however, the worlds largest investment banks decided to cash in even bigger and

began gambling in their own games. On one side, you had hedge funds gambling that mortgages would default.

And on the other side, betting the mortgages they created and resold would get paid in full, was Wall Street and

the worlds biggest financial players.


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The United States of America (US or USA) is the largest and most important economy in the world. In

2010, The US economy was responsible for 20.218 percent of the worlds total GDP (PPP) or US$ 14.624

trillion.

Yet despite leading the worlds economy for more than a hundred years, The US economy is now facing its

greatest ever challenge since World War II. This challenge has been a result of both domestic andinternational factors.

Domestically, the US economys frailties were cruelly exposed during the 2008 financial crisis. The US

economy has found it harder to recover from the 2008 financial crisis, believed to be the worst financial crisis

since the Great Depression, as compared to previous downturns. Consumer confidence within the country is at

all time low, perpetuating the slow economic growth since 2008.

On the international front,it is increasingly likely that the US will lose its status as the worlds largest

economy. According to the latest IMF forecast done in April 2011, China is expected to overtake the US by

2016. This has come as a major surprise for the global communityprevious forecasts had predicted China

overtaking the US by 2035 at best.

US debt crisis unlikely to impact Indian economy

Ashish Gupta, ET Bureau Jul 31, 2011, 02.29pm IST

The clock is ticking. Everybody is watching with anxiety. Thanks to the rising fiscal deficit, the US is on the

brink of losing its AAA rating. What does this mean? And will it have any repercussions on India? Will it lead

to a severe economic downturn like the one in 2008?

The US is struggling to arrive at a plan to raise the debt ceiling of USD 13.2 trillion. In case it fails to do so, it

risks losing its AAA rating as well as defaulting on its sovereign debt. The US economy has been under stress in

the recent months. The GDP increased by 1.9 percent in the first quarter of the year.

Economic crisis in USA to have positive impact on crude oil, bank debit rate, gold in India

New Delhi: At a time when USA is under debt crises and has lost its famed AAA rating, Indian economy islikely to face its impact. But certain positive changes are expected too.

According to the experts, the present economic scenario of Europe and America will help to cut down the

skyrocketing price of petrol and diesel in India. Also, relief from food inflation is expected.

The price of crude oil in the international market is adversely affected by less demand from USA. In the year

2008-09, during global recession, crude oil price plunged from 145 dollars per barrel to 50 dollars per barrel. It

is expected it will happen this time as well.

Presently, one barrel of crude oil costs 107 dollars in international market. Last time when Indian government

decided to increase the cost of diesel, Kerosene and LPG gas, crude oil was 95 dollars per barrel. In present

circumstances, if crude oil prices decrease to less than 95 dollars, it will help to cut down the retail price.

Besides, economic crises will attract investors towards gold. The Commodity market expert of Angel Broking,Naveen Mathur said that owing to the dip in the share market, investment in gold will increase one again. In


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such a situation, the cost price of gold will touch new heights. Another expert said that within few weeks festival

season is about to begin, which will increase the gold price. But silver price is expected to fall.

Experts are of the view that present trend of global market will affect the commodity market. Especially, if

China's economy falters, it will affect the food market globally. In international market, eatable oil, sugar, milk

and its product, wheat and other food products price will be reduced.

Apart from this, debit crises in America and Europe will bring down the bank debit rate. According to the FICCI

reports, Indian industry cannot bear the burden of debit rate at a time when global demand is less. Therefore,

RBI will cut the debit rate as they did during 2008-09 global recession. It will make home loan and other bank

loans cheap.

Continuously Evaluating Impact Of US Crisis On Indian Economy: RBI (

Commenting on the recent developments relating to the US economy and its implication on the international

economy as well as on Indian economy the Reserve Bank of India (RBI) said it was closely monitoring the

situation and would continuously assess the impact on the Indian economy and financial markets. However, on

the policy and regulatory framework, the RBI said that the entire policy and regulatory framework of the

country must be 'prepared to respond to turbulent financial market conditions arising out of externaldevelopments'.

In a statement RBI said that, 'the Reserve Bank is closely monitoring all key indicators and will continuously

assess the impact of global developments on rupee and forex liquidity and macroeconomic stability. We will

respond quickly and appropriately to the evolving situation.'

In a statement central bank said, 'A sharp fall in US equity markets on Thursday was followed by a downgrade

in the long-term US sovereign rating by rating agency Standard & Poor's from AAA to AA+ with a negative

outlook on Friday.' However, other leading agencies such as Moody and Fitch had maintained their AAA rating

for the US. This development had increased the concerns over the global economy recovery as European nations

are already fighting against the debt crisis. By adding further RBI said, 'the downgrade has raised concerns of

continuing turmoil in global financial markets, as investors re-allocate portfolios in response to heightened risk

perceptions stemming from both developments.'

Commenting on the Friday's sharp fall in the stock markets, RBI said, India was not insulated from such

developments. However, on the impact of 2008 financial year crisis RBI said, 'It may, however, be noted that in

the worst phase of the recent global financial crisis, the economy grew by 6.8 percent, suggesting high resilience

emerging from domestic factors. While downside risks to growth may have increased in the wake of global

developments, they are likely to have limited impact."

The apex bank also said its immediate priority was to ensure that adequate rupee and forex liquidity is

maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates. However,

RBI feels banking system is not facing any liquidity pressure. It said 'Rupee liquidity is being provided through

the repo window of the Liquidity Adjustment Facility (LAF). As of now, the banking system does not face any

liquidity pressures, as evident from the low level of dependence on liquidity injections under the LAF.'

'As regards forex liquidity, in anticipation of financial market turbulence related to the US debt ceiling impasse,

the RBI has made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements

in the event of significant capital outflows. 'This exercise indicated that there were sufficient liquid reserves to

meet the demand for forex even in a stress scenario,' it added.

Why is the US financial services sector critical for Indian IT?


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The current US financial crisis has been variously compared with the 1907 banking/credit crisis, the Great

Depression and the dotcom bust. Its been quite a roller-coaster ride for the world economy with financial

services dominating the headlines world overcompanies writing down losses, companies merging, acquiring,

and going bust. The latest saga including Lehman, Merrill and AIG has unnerved the financial world and created

serious concerns among their business partners, especially the Indian IT players.

The current crisis parallels the 2001-2002 bust especially for Indias IT (export) sector. Approximately 61% of

the Indian IT sectors revenues are from US clients. If you just take the top five India players who account for

46% ofthe IT industrys revenues, the revenue contribution from US clients is approximately 58%. About 30%

of the industry revenues are estimated to be from financial services. In addition, from a qualitative standpoint,

the tentacles of the financial sector business are quite well-entrenched and have significant structural impact as

well.

The size and maturity of the IT industry today are far ahead of the 2001 days, and the current model has signs of

irreversibility and long-term competitive advantage. While GE invented the industry along with Indias

biggest IT outsourcing firms, the US financial services and insurance sector (BFSI) was one of the earliest

adopters of the outsourcing trend in a big way.

The US BFSI players created large outsourcing chunks, made Indian IT players learn from their experience,

negotiated aggressively on pricing, pushed for service level commitments, and rewarded with more work to all

who excelled in taking on their challenges. Between 1999 and 2008, the share of US financial services revenue

as a % of total revenues for the Top 3 Indian players thus went up from 25% to 38%.

In the minds of the BFSI US players, Indian companies were flexible, delivered good quality (resources), and

gave a key lever in managing their SG&A and time to market by freeing up more critical IT resources. They

were essentially partners in taking some of the fixed costs out of their SG&A. Partnering in the operating

business areas was still far away and is a tad far even today. It is ironic that this crisis would have had a worse

impact, if Indian firms had partnered with the financial services entities much more closely, tying up their

invoices with the clients business outcomes.

Top Line Impact


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A recent study by Forrester reveals that 43% of Western companies are cutting back their IT spend and nearly

30 percent are scrutinizing IT projects for better returns. Some of this can lead to offshoring, but the impact of

overall reduction in discretionary IT spends, including offshore work, cannot be denied. The slowing U.S.

economy has seen 70 percent of firms negotiating lower rates with suppliers and nearly 60 percent are cutting

back on contractors. With budgets squeezed, just over 40 percent of companies plan to increase their use of

offshore vendors.

The US financial crisis puts a question mark on growth for Indian IT in the short-to-medium-term. At the time

of Q1 results, we saw growth numbers that were revised down by 2-3% after sentiment started building up

against the US financial sector. A worse downward revision is expected this quarter as well, though some larger

players like TCS and Satyam have officially denied any possible impact on growth. Going by Infy numbers, a

gloomy forecast can be expected.

However, there are some offsetting factors softening the revenue slowdown - favorable Rupee-Dollar exchange

rate, growth de-risking through Europe, growth in non-financial verticals, and growth through countercyclical

new business (countercyclical to US slowdown). There may still be some hope of revenue growth from new

avenues, albeit resulting from the current crisis.

Merger activity is going to provide new outsourcing opportunities(as Infy confirmed), as newly-merged entities

may have to look at additional or new providers to support the integration work and a broader global presence -

especially when you take into account the huge size of combined international operations. In addition to the

M&A activity, financial institutions will be looking to reduce their SG&A costs quickly, which will opt for

outsourced solutions that impact the bottom-line - i.e. F&A BPO and some ITO and possibly some HRO deals,

where there is quick remediation of staff.

A quick look at some numbers - taking the Q1 guidance

numbers in Dollar terms and the FY09 guidance

provided post the Q1 results, we can arrive at the

implied QoQ growth for the next 3 quarters required to

achieve these numbers. The numbers as given in the

table seem quite high, especially if seen with the lens of

the current crisis. Hence, growth projections are tough

to do in the current situation. However, the depreciating


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Rupee gives them additional Rupee growth to hit the numbers, assuming lower hedging.

Brace for large top line impact from several industry players and especially those with financial services

exposure.

Bottom-Line Impact

It is very difficult to replace fixed costs with variable costs at short notice of say a month. Hence, the focus will

have to move to across-the-board fixed cost-cutting since making the costs esp. overheads and support costs

variable at short notice is impossible.

Pricing has been difficult in this sector compared to other sectors: On an average, the US financial sector has

driven bulk volumes through lower onsite pricing, higher offshoring and aggressive volume discounts. It is safe

to infer that BFSI application business margins especially in the top companies are a few percentage points

below the higher margin verticals like, say, energy. Hence, a replacement of financial services business with

business from other verticals is likely to positively impact the bottom-line. A speedy replacement is however,

easier said than done.

Exchange Rate: The Rupee-Dollar exchange rate benefit for a company that would have done zero-hedging, is

in the range of 10-12%. However, if we analyze the top few firms, the median seems to be around an offset

benefit of around 2-3% on the bottom-line, assuming some hedging.

The Rupee has depreciated since the last quarter by more than 10% which has had a positive effect on both top

line and the bottom-line in Rupee terms.

This is to an extent countered by the significant hedging done by the IT biggies, the ramifications of which

translated into forex losses for them in the June quarter. This may bite them again this quarter. For example,

TCS has hedged about US$ 2.2 billion for the year at Rs.45/US$. According to the June quarter results

transcript, at Rs.45/US$, the mark-to-market loss on this would be about US$100 million. And, considering the

Rupee has moved beyond Rs.47/US$ into the first week of October, this can be far worse.

There is also another issue with this currency pantomime facing firms like Infosys, which derives 28% of its

revenues from the Euro, British Pound and Australian Dollar. The US$ has also been appreciating against these

currencies. These earnings translated into US$ will have a negative 2% impact on the companys numbers.

Taking these factors in to consideration, the currency depreciation does not paint as rosy a picture as we can

imagine.


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Cost-Side Controls

Wages are stabilizing and overall will have a positive impact on profitability due to lower attrition and hence

lower recruitment costs. Wages as a % of top line also go down due to depreciation and labor market conditions.

Similarly, pushing higher variability into wages can bring more benefits. And so will managing bench more

aggressively and employee performance management programs.

EfficienciesIndian IT companies continue to be made of the same DNA as during the dotcom days, and

measures to shore up efficiencies are already underway since we saw the exchange rate hit 39 to the Dollar.

Some of those gains are permanent since the processes have not been rolled back after the Rupee started

depreciating. Potential measures are voluntary salary cuts, complete moratorium on salary raises, travel

reduction, tightening of promotion spends, just-in-time hiring, hire-after-contract, etc.

G&A levers like payables, facilities costs, transportation and some of

the internal IT spends can aid more cost efficiencies. Relooking at the

Selling, General & Administration (SG&A) expenses, with a view to be

conservative would help, especially the second Tier IT firms. There is a

difference of about 10% between the SG&A of the top firms and the mid-

level ones. Some conscious pruning on this front will only aid the bottom-

line to move upwards (hard because of lack of economies of scale, but

some aspects like making costs more variable and postponing some of the

support and operational spending, are achievable).

While we have looked mainly at IT, the ITES sector is joined at the hip with IT industry, but with its own

flavors. The impact in financial services operations will be much larger, but, over the medium to long term,

there will be a huge gain for them from the increase in outsourcing and offshoring in the financial sector.

However, short-term pain alongside the US slowdown is inevitable.

Conclusion and Opportunities for Indias IT Sector

While there are growth-related challenges in the short-to-medium term, there seem to be some opportunities for

managing the bottom-line for the rest of the year. The macroeconomic environment is depressing and has

impacted the overall confidence in the sector from a market perspective. A US recession has not started but if it

does, in all probability, it will last through 2009 and more, making this period a challenging one for growth.


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Despite the foreboding current financial crisis, the opportunities are:

Make the growth vs. profitability tradeoff early on during the slowdown (which is now). Profitability levers

are still available if growth is sacrificed where required, and managed well.

Utilize some of the unavoidable fixed costs for implementing investment ideas that have been on the

backburner and could not be kicked off due to high utilization.

Look for M&A opportunities in US, both in financial sector and non-financial sector, especially where the

option is to hold cash vs acquire.

1. Financial sector companies: Distressed assets in the mortgage and other financial services industry

are available to be picked up by Indian costhe assets are laden with debt and a lack of good forecasts

on future business.

2. IT companies to look for IP and product related investments especially in the US

3. BPOs, especially captives, with significant financial services exposure are available for investments

for Indian players.

Focus on operational efficienciesefficiencies that can help shore up the bottom line especially in an

attractive labor market and an environment of budget/spend uncertainty.

All in all, the environment looks weakest in a long while, and yet there remain pockets of opportunity. These

areas, if tapped intelligently, would enable the IT firms to ease the blow of this financial crisis and help them

tide through the tough times. The crisis has now spread globally, and further reduces room to maneuver.

FINANCIAL TIMESUS debt crisis unlikely to impact Indian economy31 Jul, 2011, 1429 hrs IST, Ashish Gupta, ET Bureau

The clock is ticking. Everybody is watching with anxiety. Thanks to the rising fiscal deficit,the US is on the brink of losing its AAA rating. What does this mean? And will it have anyrepercussions on India? Will it lead to a severe economic downturn like the one in 2008?

The US is struggling to arrive at a plan to raise the debt ceiling of USD 13.2 trillion. In case it fails to do so, itrisks losing its AAA rating as well as defaulting on its sovereign debt. The US economy has been under stress inthe recent months. The GDP increased by 1.9 percent in the first quarter of the year.

The second quarter hasn't been good either. The industrial production has slowed down. Unemployment figureshave been growing.

The budget released earlier this year showed a staggering USD 1.65 trillion deficit for the current fiscal year.

The US national debt has increased, and touched USD 14.3 trillion in May. This is forcing the US to use variousmeans to keep the economy going.
http://m.economictimes.com/PDAET/quickiearticleshow/9428086.cms


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It can continue only till August 2. At that point, the US will face a choice between cutting the dollar spending,and defaulting either on debt repayments or on other obligations such as health or retirement benefits. Failure toraise the US debt ceiling by then will send shockwaves throughout the global economy.

President Obama is trying to build public support for a package proposed by the senate, saying that failure toincrease the USD 14.3 trillion borrowing limit will hurt the nation severely. If the worst happens, the US may

lose its topnotch AAA credit rating from the rating agencies.

The US government debt is a benchmark for other financial markets. A credit rating cut will be felt around theworld. Investors will demand a higher return for holding US government debt. This will lead to rise in interestrates. As a result, the asset prices will increase.

The US government will have to come up with a deficit-cutting plan soon. A default or significant creditdowngrade in the US will be a serious event and will have far-reaching consequences across the world.According to the IMF, failure to reach an agreement will have serious consequences for the global economy. Adefault will push up borrowing costs.

So, finances such as credit card loans, mortgages etc will be expensive. The longterm alternative is for thegovernment to cut its spending and increase taxes so as to control the fiscal deficit. As a result, the dollar fell

across the board, hitting a record low.

The main gainer has been gold. As an outcome of all these developments, the demand for gold has increased. Asgold is seen as a safe haven, its price has risen to a record high. As the domestic economy is not insulated fromthe world economy, there will definitely be some tremours here. Both imports and exports will be impacted.India's exports to the US, particularly IT services, will have an adverse impact.At the same time, there may be higher inflows of foreign institutional investor (FII) funds. This will lead to

appreciation of the rupee, which in turn will help bring down the current account deficit.

The RBI has said the country has sufficient liquidity to manage a possible US sovereign debt default. The RBI is

prepared for any repercussions in the financial markets arising from any such eventuality. With a reasonably

strong financial system in place, India is likely to bear the shocks, as in the 2008 turmoil.

The Impact Of The US Meltdown On The Indian Economy

By B Sivaraman"Indian economy is insulated from the crisis The global financial crisis will not affect us much," [IndianFinance Minister Palaniappan]Chidambaram said, at first. Chidambaram went on in this vein until both he andhis boss [Prime Minister] Manmohan [Singh] had to reluctantly admit that no developing economy couldpossibly remain immune to the global crisis. Still, it was projected primarily as a financial crisis or at best a

precursor to a mild recession. But no financial crisis is ever a mere crisis of the world of high finance alone. Justas the gloom on the trading floors soon spread to the shopfloors in the factories, financial turbulence is just asymptom of the turmoil in the real economy.

"The contagion is truly global in a globalised world. How can the highpriests of globalisation in India expect to insulate the country fromthis all-pervasive crisis?"

In a global crisis of such historic proportion where the total bailout packages by all countries work out to some 3trillion dollars but where there is still uncertainty whether the system can be salvaged, it is stupid to pretend that

India would be immune to the systemic crisis. A finance ministers (FM) job is not to give false hopes. Panic atthe stock markets cannot be prevented for long with pep words from the FM. Till October 14, the Bushadministration alone has announced bailout packages to the tune of over $ 990 billion apart from injecting freshinvestment worth $ 200 billion in banks and private financial institutions to shore up their financial position.The contagion is truly global in a globalised world. How can the high priests of globalisation in India expect to

insulate the country from this all-pervasive crisis?! Already the financial crunch is having its impact on theforeign institutional investors (FII) hot money in India . Just wait for the impact on trade, foreign direct


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investments (FDI), exchange rates, remittances, balance of payments (BoP), forex reserves and, above all, on themacro-economy in India. Goodbye to the rosy stories of double-digit growth miracle, it is now an impendingdebacle that stares economic analysts in the face.

The possible social impact is mindboggling. The new middle class in India is witnessing its first financialmeltdown and a possible deep recession. The information technologybusiness process outsourcing (IT-BPO)myth would soon be blown. The possible BPO gains could hardly make up for the IT sector losses inflicted by

recessionary economies in the developed world. Anyway, if the job losses are already running into lakhs(100,000s) in the US , one can well imagine how much political pressure will build up there against outsourcing.If such leading names like Morgan Stanley, Merrill Lynch, JP Morgan, Goldman Sachs and Lehman Brothersstart biting dust and their brightest kids are given unceremonious marching orders, Indian B-school products aresurely in for a bad patch. Pre-election political pressure may have forced Jet Airways to take back its decision toterminate 1900 employees, but the job scenario in the so-called high-growth high-wage sectors has alreadyturned gloomy.

All booms in India , based primarily on foreign money, will soon go bust. The recession-ridden USconsumer/industry can hardly sustain the growth miracles of China and India . The surpluses of the Indianbourgeoisie would find a greener pastures in greater and greater acquisitions abroad than investing anew in adwindling economy at home. Didnt the Swiss bankers association point out a few months back that Indians

were holding $1.4 trillion in Swiss banks? A sum about 40% larger than the gross domestic product (GDP)! Theonly breed that will thrive is the breed of speculatorsin stock markets, currency trade and possibly in the realestate, gold and art pieces where the desperate wealth would flow.In US, if it was first the speculative housing market bubble/subprime and then the financial bubble, in India it

has just begun with the stock market bubble and possibly the real estate bubble. When it extends to theinvestment bubble (what with the special economic zones (SEZs) and other fabulous concessions, the telecombubble, the IT-BPO bubble and so on), all claims of India having weathered the storm would wither. Indiaperhaps might go under late and might take longer than the rest of the world to come out. All over the worldthere are 77 tax havens like St. Kitts and Cayman Islands . But in India there are 580 SEZs!

The Immediate Impact on Indian Stock Markets

The festival season in India was seldom so gloomy for the share market. Investor wealth worth Rs. 250, 000crore (1 crore = 10 million) was wiped out on the bourses on a single day, on 10 October. The Sensex fell by

1000 points before recovering some 200 points, an intra-day drop of some 800 points. The lachrymal wavewashed away the festive mood.At the first sign of stock market crash and FII funds stampede, the United Progressive Alliance (UPA)

Government has once again permitted P-notes (participatory notes) paving the way for enhanced speculation.The present convulsion in the Indian bourses would look mild before any possible explosion in future as a resultof this heightened speculation. Despite the government itself acknowledging that the P-notes were beingabused/misused at the time of banning them, no safeguard has been put in place. Anyway, how can there be anysafeguard within the realm of speculations? It is absurd.

Impact on Indian banks

Indian banks are safe, reassured Reserve Bank of India (RBI) Governor Subbarao repeatedly. Indian banks'

exposure to international markets is relatively small at 6 percent of their total assets, the rating agency Crisilsaid, adding that even lenders with large international operations have less than 11 percent of their assetsoverseas. But a mini-version Indian bailout was in the making simultaneously in the first week of October withthe government virtually shoring up two mutual funds and Life Insurance Corporation (LIC) coming to theurgent rescue of three more which landed into liquidity crisis in the backdrop of a steep crash in the stock

markets.

At a time when the big names in Western banking industry are queuing up for bailouts, there may be a suddenleap in non-resident Indian (NRI) deposits in Indian banks as these funds would look for a safe haven backhome. We can hence expect a big clamour from the NRI lobby for greater concessions for their deposits.

Chidambaram would only be too willing to oblige. The RBI recently increased the credit cost on termborrowings (with more than 7-year maturity) to Libor+4.5% and even then the big Indian corporate names arefinding it difficult to raise funds amidst the present turmoil. Indian borrowers will end up paying more for theforeign lenders and Indian banks might be forced to pay more for the NRIsall in the backdrop of a creepingrecession and falling rate of profits.


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Even when Chidambaram was preparing to pass some 66 reforms-related pending Bills in possibly the lastsession of the parliament and a committee had prepared a blueprint for major financial sector reforms, the USfinancial crisis fell like a bombshell. No doubt, the UPA ideologues would also use the global meltdown as a

pretext to push the same risky reforms. In the years to come, as the new investment projects go under one afterthe other and investors and insurance companies and hedge funds go under trading in credit default swaps andall such devices, the financial crisis here in India might be the denouement rather than the beginning as in US.

ICICI, the symbol of new breed of unscrupulous financial manipulators, is already in doldrums.

Increasing liquidity

Liquidity position in India is comfortable, said RBI Governor Subbarao after a slew of measures. But he avoidedhinting at any possible reduction in prime lending rates. The liquidity position may be comfortable, the banksand financial institutions might be slush with funds once again but with interest rates ruling high there is no pickup in the credit offtake by SMEs (small and medium enterprises). As they are the main employment providers inthe industrial sector, the employment in this sector has already taken a heavy toll. A deep and prolongedrecession in the West might result in unemployment for millions of these workers.The RBI hurried to cut Cash Reserve Ratio (CRR) by 150 basis points to 7.5 per cent, releasing more than $12

billion fresh liquidity into the Indian banking system. But if mere money supply alone can drive the economy

and industrial growth forward uninterruptedly, then no economy will ever face any recession and there cannotbe a meltdown of this nature. However, amidst all-round alarmism and panic reactions, confidence buildingitself has become the main plank of economic policy!The government has once again liberalized ECB (external commercial borrowings by corporates). It is adifferent matter that in the light of the meltdown nobody would bother to take a second look at dollar bondsissued by Indian banks despite all their backing by the Indian government and hence they are abandoning theidea raising external funds/borrowings. While RBI might come forward to infuse liquidity liberally in the short-term, wait for the booming NPA figures in the medium and long term.

Exchange Rate: Rupee Depreciation

When the western economies are going into a tailspin one after the other, the appreciation of dollar and euro

looks somewhat paradoxical. From unprecedented appreciation earlier a few months back, the rupee fell torecord lowreaching Rs.49 per dollar at some point. The dollar is gaining vis--vis rupee because of theoutflow of the FII funds and since the worst is yet to come in the US /global meltdown, a repeat of the EastAsian crisis in India is very much a possibility. During the preceding period, if the rupee appreciated by around18%, now it has depreciated by around 19% during this Jan-Sept.The exporters who were crying earlier are happy but it is now the turn of importers to come to grief. Not manypeople know or remember that manufacturing imports had overtaken total domestic manufacturing production inthe domestic organised industrial sector this year. Apart from cost escalation and consequent reduction in profit

margins, just wait for the impact of the rupee depreciation on inflation. The confident prediction of possible fallin inflation rate to single digit by January sounds hollow in the backdrop of this as well as the cut in CRR ratesand other measures by the RBI aimed at increasing the liquidity.

Impact on Trade

The trade deficit is reaching alarming proportions. If exports are growing, imports are growing even more.

Thanks to workers remittances, NRI deposits, FII investments and so on, the current account deficit at around

$10 billion doesnt look so threatening. But for some reasons if the remittances dry up and FIIs funds take flight,it will be a repetition of 1991 after a few years if forex reserves get depleted and trade deficits keep increasing at

the present rate. Even as the countrys exports and imports registered a substantial growth of 35.1 per cent and37.7 per cent in dollar terms, respectively, during the first five months of the current fiscal (April to August), the

trade deficit during the period has shot up. The trade deficit was around $14 billion for a single month of August2008, a record level. Even Goldman Sachs prediction that India s forex reserves would decline to $271 billion

by year end from $310 billion in March 2008 looks a very conservative estimate.Unprecedentedly high forex reserves were becoming a burden. As most of these funds were in dollars, thegovernment had parked most of them in US treasury bonds or invested them in securities and bonds in foreign

banks. With the meltdown and consequent poor returns following rate reduction, these treasury investmentshave taken a beating. The government had its fingers burnt with the earlier dollar depreciation. A part of thesefunds could have been used to clear some of the external borrowings. Now with the recovery of the dollar,


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repayment costs in rupee terms have also shot up. A golden opportunity was missed. The government wastoying with the idea of establishing a wealth fund/SPV (Special Purpose Vehicle) with these reserves to financeprivate parties taking up infrastructure projects through PPP. But, despite all the hype, the PPP has been a total

flop so far.

An Indian Recession?

It might be just a slowdown in India till now. But a recession cannot be ruled out in the medium term.Chidambaram is claiming 7.5 - 8% growth this year. ADB has predicted 7% growth. Many rating agenciesestimate industrial growth between 6.5% and 5.2% from around 11-12% in 2006-07. It is hoped that agriculturewould be the saving grace this year thanks to a good monsoon. But just recall that Chidambaram was boastingabout a possible 10% growth early this year after the budget and the situation has changed!True, there is a boom in FDI this year. The total FDI between April and August this fiscal stood at $14.6 billion.A record figure. Average monthly FDI inflow is above $2 billion whereas a few years back that was the annualfigure. Kamal Nath was confidently asserting that the target of $35 billion for this year would be achieved. But acloser look reveals that a sizable chunk of this FDI going into mining loot, services, financial services inparticular, entertainment industry including luxury hotels and so on and also on mergers and acquisitions

(M&As) not mainly to fresh investments in the core productive sectors alone. The long-term sustainability of

such a pattern of FDI flow is anybodys guess. Especially, in the midst of the global liquidity crunch. Inflowsinto already committed projects might give a false impression and it remains to be seen how long this boom willcontinue. To sustain it, Chidambaram is bound to come up with a slew of fresh liberalisation measures. FDI capsin insurance, banking and financial services are already being hiked. There might be 100% FDI in single-brandretail. There will be more and more sellouts to attract foreign capital. Chidambaram keeps repeating ad nauseamthat India , like China , will continue high growth despite recession in the developed countries.Well, if high growth is to be driven primarily by foreign capital assisted by government landgrab, tax waivers,assured returns guarantees for infrastructure investments and fabulous BOT terms and so on, in short, by makingthe whole of India into a tax haven, the structural distortions this Manmohan gamble would lead to ismindboggling. Leaving a handful of big business houses and Indian MNCs, nothing Indian would be left in the

Indian economy. And even the India MNCs have started looking outward. India Inc spent $26 billion inmergers and acquisitions abroad this year. The global meltdown would, if anything, only accelerate this trendand the scarce capital resources would be channelized for overseas spending. If this is the story of overseas

M&As by Indian companies, M&As in India by foreign companies is even more breathtaking. In power sectoralone, the merger and acquisitions worked out to $5 billion out of a total M&A value of $55 billion in theinfrastructure sector alone. This is the secret behind the high FDI. But overseas M&A is not a rosy path. Tatas

teamed up with AIG which was one of the first to go under. TCS, Infosys and WIPROall were on anacquisition spree abroad but at home they are the leading ones in issuing pink slips.The nation would soon realize the real cost of the N-deal. N-deal was also a sort of bailout for the US industry.Kakodkar has once again made it clear that 20 nuclear reactors would be set up! How in the given situation thegovernments would foot the bill in the next ten years?

The Deflating Growth Bubble

And what about the growth story? Well, the ratio of savings and investment to the GDP reportedly remains high

at 35 per cent. So far so good. Still, there is a slowdown in the Indian economy. The core sector growth is downto less than 4 per cent. All vital productive sectors are on a slowdown. With such a structural background, if andwhen the Indian economy slips into a recession, the recession will be protracted and there will be no a quickrevival. Crude oil prices have declined to $80 a barrel. The monsoon has been good in most parts of the country.For a couple of years it is not difficult to continue with the growth story. But infusion of liquidity, i.e.,

increasing the velocity of circulation alone in other words, can hardly sustain production. The basic structuralflaws are bound to come back to the fore and haunt.The problem might be made to look minoras that of liquidityat present but if there is a severe constraintin demand then no amount of infusion of money into the system and supply side magic would be able to save it.And given the fiscal scenario, the government would not be able to go for any fresh neo-Keynesian binge either,leave alone any major corporate bailout as in the US . Pay commissions and loan waivers might sustainaggregate demand for a couple of years but signs of slowdown are already on the wall. Despite repeatedpromptings of Chidambaram, the bankers are not ready to reduce even the home loan rates and not just the

prime lending rate for the businesses. After all, they are hardnosed businessmen and they will continue to be topexecutives in their banks while Chidambaram and his party might go out of power.


17/20

The 11th Plan estimates that to maintain an average annual growth rate of 9%, the investment in infrastructurewould have to rise from Rs. 259, 839 crore in 2007-08 to Rs. 574,096 crore in 2011-12 at constant 2006-07prices, aggregating to Rs. 2,011,521 crore over five years. In the terminal year, this works out to be 9 per cent of

the GDP, up from 5 per cent of the GDP in 2006-07. The Plan document itself says that the government cannotmanage this much money and a substantial part of it has to come from the private sector. PPP is supposed topave the way. But what is the record so far? The Government of India's Committee on Infrastructure which

monitors PPPs notes that 244 PPP projects are ongoing and another 76 are in the pipeline in the country. Thetotal capital outlay in the ongoing projects amount to a minor fraction of the total projection by the PlanningCommission. To finance infrastructure projects, the GoI established an India Infrastructure Finance CompanyLimited (IIFCL), a wholly Government-owned company to provide long term finance for infrastructure projects.According to the IIFCL website, it would provide loans upto 20 per cent of the project cost and projects"awarded to a private sector company ... [a company established] through Public Private Partnership (PPP) shallhave overriding priority". And how big is this IIFCL? The GoI has successfully persuaded the World Bank to

give it a loan of a meagre Rs.2700 crore to finance projects worth Rs. 2,011,521 crore! Making bogusprojections to justify pro-private sector policy changes is the thriving industry in India . In such a situation, canany sizable fund flow into the risky infrastructure sector of a developing country amidst tottering private banksand investment funds?Many approved SEZs are in doldrums as they are not getting any units and this whole thing is a massive realestate speculation of gigantic proportions. Even though the real estate speculation in India is taking a differenttrajectory and is not as reckless as credit instruments without any backing by collaterals as in the US subprime,the real estate bubble centering around SEZs landgrab is no less serious. Despite RBIs reservations, the banks

were competing to lend to SEZ promoters and even the nationalized public sector banks accumulating hugeNPAs would be lined up for private takeover. SEZs might finally achieve what Narasimhams two reports could

not achieve. If millions of home loan borrowers are defaulters, the banks can take back their houses. Even theycan takeover the SEZs. But if they themselves go deep into the red irretrievably, they themselves would be takenover. Companies incurring loss too would be taken over by stronger sharks. After a wave of takeovers, if the

economy doesnt revive, this would only amount to taking over the losses. A massive collapse in asset prices isthe ultimate eventuality.

Social Impact

"Suicides after market crash is an urban trend" screamed the headlines in a pink paper. Beneath that was thesob story of an entire family committing suicide after heavy loss in the stock market. "Whether it is a seeminglywell-to-do US-resident of Indian origin wiping out his entire family or middle-aged brother-sister duo killing

their parents and then committing suicide, the financial crisis has hit everyone, and has hit them hard", the reportadded. At least, the desperate farmers go alone leaving their family members in the lurch. But the scorchedmiddle class investors take their entire families along and that is the level of urban investing middle classinsecurity. This explains the golden age for gold as investment in yellow metal is considered safer. Just think ofthe hundreds of new scrips by companies with ambitious investment plans counting on these investiblesurpluses of the middle classes and also the market opportunities opened up by their wealth. All these plans fornew scrips will be scrapped. The middle class boom might be glamorous but the depression in incomes andlosses in the markets are far more agonizing. Pink slips are painful indeed and joblosses are not limited to theWest alone. Those who are hoping that jobs in the West would shift across to the cheaper shores of the India aremissing the point that domestic job losses due to recession in the West as well as a slowdown in India would far

outweigh such outsourcing gains. Even the real estate boom is going bust in Bangalore , the Indian El Dorado.The Indian BPO sector derives 40 per cent of its revenues from the financial sector of the developed countriesand exactly as they mushroomed fast they will wilt with the same speed. IT-BPO sector in India accounts for5.5% of the GDP but 30% of exports and a very high share of service sector employment in cities like Bangalore. El Dorado is poised to turn into a hell!Take the case of garments and textiles. Hardly a few months back, tens of thousands of workers, mostly women,were out of jobs in Chennai and Bangalore and towns like Tiruppur and Karur. The villain was the rupeeappreciation, leading to some 18% reduction in incomes in rupee terms. After the loot by layers and layers of

intermediaries, the factory producer was left with nothing and hence closed down the unit. Now dollar hasappreciated, smile returned to the faces of garment owners but the smile soon vanished. The current exchangerate offers handsome returns but the orders are drying up due to impending recession. No margin thenno

orders now! No jobs in both the scenarios.

The impact on the working class by means of wage compression and workloads, illegal retrenchment andworsening of job security and working conditions etc., would be onerous. Already this has started happening.For reasons of space, we are not elaborating. But we can only say there will be many more NOIDAs.


18/20

The employment in organised industrial sectorboth public and privatewas 8.98 million in 1997 but it wasdown to 7.62 million by 2005, i.e., precisely during the growth miracle if we leave out the disastrous year of2001-02 for the industry when the growth was very low. If the growth miracle turns into a debacle what will

happen to organised sector employment? Formal sector will be informalised and permanent workers will bebooted out.Bailouts for the bankrupt and boot-out for the workers. The same logic of capital! Total blackout of the possible

social impact of the meltdown and almost virtual absence of any discourse on safety measures/nets is one of thecharacteristic features of the current crisis of capital, across the globe as well as in India.

Ever since Standard & Poors announced a downgrade in the US sovereign rating, predictions have been flying

thick and fast on whether India will benefit or suffer from the latest turn of events. A look back at the start of the

crisis clearly indicates that India, being largely domestically driven, is in large part insulated from the global

crisis even with a temporary hit to growth.

But the devil is really in the details.

Various aspects of the economy will react differently to the ongoing US crisis and continued sluggishness in

growth, which will be further exacerbated by the cutback in government spending and now the S&P downgrade.

This could mean lower investments in the economy.

In this post, the 10 most important trends arising from this global trend have been analysed.

Overall growth is expected to remain largely neutral to the current play of events over the medium term (next

one year), as the negatives play off the positives, barring further negative developments. The positives are

largely on the domestic economy front. Commodity price pressures are likely to ease, thus impacting inflation

beneficially, and interest rates and credit growth as a result.

The case for foreign direct investment (FDI) remains strong, resulting in an appreciation bias for the rupee. On

the negative side, foreign institutional investor (FII) flows could remain choppy and exports might take a hit.

Indian companies might not be enthusiastic about overseas acquisitions.

#1. GDP growth: The global recession, which started in 2008, saw India report slower than trend growth rate of

6.8 percent, and it was quickly back up to 7.4 percent the following year. This time around, the ensuing crisis is

less of a shock since no one was betting on global growth. And unlike a lack of history the first time around, the


19/20

economys resilience may make a stronger case for investments. In fact, barring any more significantly

untoward global economic occurrences, the negatives and positives (explained below) should cancel each other

out, making the Indian economy largely neutral to the US downgrade.

#2. Inflation: Commodity prices, barring precious metals like gold and silver, have been under severe pressure

since the downgrade. The Reuters-Jefferies CRB commodities index is down to its lowest since December 2010

onglobal growth fears. This could bode well for Indias inflation which has been dangerously close to a double-

digit figure for almost one year now. Fuel alone accounts for over 15 percent of the headline inflation index

(Wholesale Price Index), and already there is talk of cuttingfuel pricesas crude edges lower.

#3. Interest rates: The Reserve Bank of India (RBI) has tightened policy 14 times since February 2010 owing

to high inflation. However, with an expected decline in inflation over the short to medium term, we can

reasonably expect the RBI to slow down the interest rate hike cycle, more so since there are already signs of a

slowing inindustrial growth.

#4. Credit growth: Since credit growth is at the heart of monetary policy transmission, a slowdown in interest

rate hikes augurs well for it. Some softening in credit growth to 19.9 percent as of mid-July in comparison with

21.3 percent for the corresponding period of the previous year is visible. Added to this is the fact that the impactof the last few rate hikes will play out over the next 3-6 months. A decline in inflation and, hence, an easing of

the interest rate hike cycle, could keep credit growth healthy.

#5. Exports:The US economy is one of the largest destinations for Indian goods exports, with an almost 11

percent share. It also has a substantial share in services exports. A continued decline of the US economy does

not bode well for India, partly because of the direct effect, but also because export-led Asian economies will

also be impacted by it, a number of which are among Indias top trading partners.

#6. Imports: Continued domestic strength has resulted in a healthy 36 percent growth in imports for the first

quarter of 2011-12 and the negative trade balance has increased to about $ 32 billion in comparison with $ 27

billion during the same time last year. With an expected decline in exports, a fall in crude price is a welcome

development for Indias import and trade balances, since oil imports account for about a third of Indias total

imports.

#7. FDI Inflows: With the US no longer looking like a safe haven for investments, a surge in global liquidity

created by quantitative easing and continued expectations of resilient performance by the Indian economy, FDI

inflows could be impacted positively. An indication of this is visible in the fact thatFDI inflows surged by 133

percent in the first quarter of 2011-12 to $ 13.4 billionn.

#8. Outbound FDI: The downgrade of the US economy will only consolidate the declining trend inoutbound

investmentsfrom India. The ongoing softness in advanced economies is seen as a key reason for Indias

outbound investments declining by 33 percent for the April-July period. With no resolution to the global

weakness and some expected softening in the domestic economy, investments could stay away from any

aggressive overseas investments.

#9. FII inflows: Risk aversion is always negative for the equity markets, and this time is no exception. Despite

the fact that India Inc has shown decent earnings recently, a downbeat global mood is expected to lend volatility

to equity markets in the short-term at least. While some of the blow could be cushioned by a strong growth story

for Indiain July alone FIIs have invested US$ 1.8 bn in IndiaFII flows could retain a risk to the downside

over the coming months, even with bouts of buying interest.

#10. USD/INR: It has been argued earlier as well that the US$/rupee exchange rate has anappreciation bias.

Over the medium term, continued strength in FDI inflows, slowing FDI outflows and declining crude prices are

likely to keep the bias intact. However, volatile FII flows could keep the appreciation trajectory from being

smooth.
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