Credit Crunch, Bailout and India: Where is the hype?

Although predicted by Jim Kramer as early as June 2007 in a vociferous interview to CNBC asking Bernanke to "wake-up!", the US credit crunch continues to harbor uncertainty and dismay. But the fear and the hype are seemingly non existent in India - where the consequences for world food prices can be drastic for the 75% of its 1.15 billion and growing population when 1 billion across the globe were pushed below poverty line by the crisis. Why?

The multifold argument stems from one simple core difference in Indians: mindset. Culturally, Indians are less inclined to spend on credit, forget taking housing loans with as little downpayment as 10% (as was prevalent before the crisis in US). So when the then Indian Governor Mr. Y. V. Reddy stuck to the conservative high regulation attitude and emphasized corporate disclosures, it was a blessing in disguise for Indian banks which are less exposed directly to problem assets. Secondly, even when exports and the stock market faced gloom, India's FDI's inflows were surprisingly as sturdy as ever. How was this possible with the US financials and auto-industry collapsing like a house of cards? Well, the same industries continued their investments in India realizing that with a forecasted 6% growth rate, India was still far better than the recessionary American or European markets. The billion dollar US bailout of GM would go a long way in helping it continue with the proposed billion dolar worth plant proposed in Gurgaon.

Although it is debatable if India has received its due recognition in the world, the crisis will surely open up the country to hoards of new investors looking to tap in to its consumer base and the country ganing new recognition in the G-7 meta-process when the combined GDP of BRIC countries could overtake the combined economic might of G7 as an aftermath of the financial tumble.

Furthermore the most important for India are its 75% of the population living below USD 2.5per day. When inflation fell from the 12.91% in August to 5.2% of January, the poor pocket became half as strained as it would have been without the monetary expansion to counter the crisis. Real India isn't the stock market or the exporters worth billions which experienced shocks, it is the low and medium income families who actually provide the services and manufacturing products to which the elites act as in intermediary in selling it off to the developed world. Thus overall, the crisis has come across as a boon in disguise to the Indian poor, to its banks, and its future recognition as a force to reckon with in the new world order after a financial restructuring.

Privatization of Power: Profiting from Poverty?

This post is motivated by an observation by 'War on Want,' a London based organization which argues that privatization of power and other basic necessities in developing countries is akin to profiting from poverty. The argument lies that 1) World Bank and IMF restrains emergency aid and debt relief to countries unless they privatize their utility services (water, power, gas); 2) privatization often leads to global conglomerates hiking prices for the poorest of the poor to cover investment costs and then juicing the money out of the country.

The concerns are valid albeit their presentation far too biased. Resolutions to these are barely considered with mass strikes against power privatization in Andhra Pradesh and Maharashtra in India highlighted but its effectiveness in Mumbai and Delhi denied any appraisal. Agreeably, the poorest of the poor live far from these metropolitans, but an imposition of 4:1 rule to accommodate power for poor states could be a much better solution than completely negating privatization and multinationals as devils fostering poverty.

Disinvestment is urgent in India where 42% of public power is stolen and unpaid for, if it wants compete against neighbour China which has a commendable 3% loss. Large deficits (73k million units) of power continue to hamper infrastructural improvements in India which will need more than 400,000 MW of electricity (which is more than a whopping 120% of what it currently has) by 2020.

Privatization of major utilities such as water and power is often discouraged as it leads to monopoly access to the country's most needed resources. India, however, is a case of monopolistic competition due to 1) a check on entry deterring strategies by monopolies and 2)already existing tiering of power bodies at the State and National levels. However, War on Want's vehemence towards Globeleq is probably justified in case of India. Entry of foreign firms leads to huge foreign exchange outgo and loss to indigenous industry supplying power equipment. But the case for Indian players Reliance and Tata power still stands credible if the nooks and corners of the 100 million strong country are to be reached.

But these companies need to be incentivized to follow something akin to the 4:1 policy implemented in the case of Social Banking Experiment of the 70s. The banking experiment lead to drastic reduction in poverty and availability of credit as it forced private banks to open 4 banks in unbanked locations before opening 1 in urban areas. A similar yet easier policy could be of supplying power free of cost to 4 villages for every city charged for power. Easily accessible and efficient power to farmers, small village enterprises, rural households, schools and medicine dispensaries would no doubt go a long way in closing the ever widening elite-poor gap.