FINANCIAL VOLATILITY IN INTERNATIONAL MARKETS- POLICY CHANGES NEEDED TO PROTECT INDIA
The Indian economy has registered a 7.4% GDP growth in 2009-10, with quarter-4 growth pegged at 8.6%. This has been contributed by about 10.6% growth in mining sector and 10.8% in manufacturing sector besides around 10% growth in services sector. The Finance Minister is quite positive to achieve 8.5% growth in the current year. In spite of impressive performance on GDP growth front, we cannot ignore alarming facts in the Indian economy including-
- Fiscal deficit of more than 6.6% of GDP. The Govt. has very high burden of oil subsidy, agriculturist loan subsidy as well as NAREGA contribution.
- Acute inflation, specially the food and other basic amenities inflation is moving between 15% and 20%;
- Agricultural growth is limping for last several years; The agriculture sector has performed poorly with only 0.2% growth in 2009-10.
- Very heavy sovereign debt burden on the Indian government, resulting into approximately 99.5% of tax collection being used for debt re-payment and interest. The debt service coverage ratio is alarmingly low or may be negative;
- The equity market is highly volatile;
- The foreign exchange market has also not yet stabilized;
The aforesaid situation becomes a matter of great concern in the backdrop of sovereign debt crisis in Greece, which has threatened to engulf the entire EURO zone. Portugal, Hungary and Spain are already in the deep red and Italy may be on the anvil? The euro a common currency for 16 European nations have touched a 4-year low of $ 1.2150. The European Union and IMF have put together a $ 1 trillion package to rescue the European Continent. As there is no single regulator for EURO,
cracks are appearing in the shape of some members countries are refusing to be part of the bailout package for defaulting countries. The picture becomes further bleak in the backdrop of fall of more than 100 banks in USA and about 2 Dozen in Europe in last 2 years, arising out of the US financial
market crisis triggered by the fall of Lehman Brothers and other bigwig in the US and the European market. The crucial question knocking the door of Indian economy is how to ensure financial stability in India as the European crisis may result into -
- A major impact on liquidity with Indian banks, especially PSU banks who have recently either made aggressive lending in European countries or have borrowed heavily from there;
- In view of uncertain economic condition locally in EU, the exports from India to Europe may be severely hit, which accounted for 27% of India's trade;
- Capital market shall face tremendous volatility.
To ensure success of the Indian economy, financial stability is a must and it is necessary for the
Government to consider -
- To improve transparency in fiscal discipline to ensure optimal fiscal deficit without compromising on infrastructure spending
- The threat of sobereign debt is seberely high in India. The Government needs comprehensive Debt restructuring including OTS kind of repayments utilizing FOREX Reserves and disposal of unrequited assets.
- The Govt. Accounting System is age old and provides very little MIS and warning signals. Thus a modern sophisticated accounting system and MIS is to be put in place for Govt. accounting.
- To control the volatility and risk in the Indian foreign exchange market by ensuring that the derivative contracts of Over the Counter (OTC) as well as on the stock exchanges is restricted to only an underlying exposure.
- Reforms in banking sector to ensure consolidation are required to be taken without delay.
- It is important to re examine the liberalization of the derivative market in the equity segment as well as in the commodity segment is required to be re- examined.. There is a strong case to restrict the derivatives to the underlying contract and be limited only to real hedging. The excessive speculation in the name of price discovery is not contributing to any economic purpose. The right of writing an option, cannot be and should not be allowed to small investors and be restricted only to high net worth banks or institutions, that as well subject to necessary checks and balances.
- The proposed transition to international financial reporting standards, thereby adopting fair value accounting for all major corporate, banks, insurance companies, mutual funds and other public interest entities has to be carefully examined. The same/ similar financial reporting standard miserably failed to indicate financial crisis in the European as well as in the American economy. The fair value determination on the basis of formulas should not be allowed and should be restricted only to those cases where active markets exist in a fair and transparent manner. The Indian economy has to ensure that it does not suffer from European like crisis and financial stability is a right answer.
We wish to conclude with a silver lining as big opportunities of acquisition of businesses in Europe
may arise for Indian Investors , of course, liquidity issue has to be resolved.