S R Ramakrishna's Blog

Tuesday, January 06, 2009

Lessons from a crisis

Ripples of the US recession are touching distant shores. Corporate India, which just five years ago was dying to fully hitch itself to the American economy, is now relieved it wasn't. It is apparent the Indian economy has managed not to collapse in these hard times only because it wasn't hitched to that once powerful and now broken wagon.

Those affected by the American stock market madness are asking uncomfortable questions. Why were pension funds invested in risky stocks and mutual funds? The American magazines are full of stories about pensioners having to return to work because they have nothing left to live on. Fortunately, India has escaped that tragedy.

In India, traditionally, provident fund, insurance and pension money remained safe from speculative investment. The people being thanked for India's relative economic security are conservative policy makers and strict RBI governors.

Here at least, we seems to be suddenly waking up to the idea that American excess isn't the way to go. The undoing of the American auto industry, for instance, is rightly being attributed its disregard for fuel efficiency. The Big Three, as Chrysler, General Motors and Ford are called, kept making fuel guzzlers, and it looks like they have now lost their battle to Japanese car makers who understand oil must be used frugally. In India, fuel efficiency has always been a concern, and although we do see big cars on our roads, automakers don't try to peddle notoriously fuel-inefficient monster cars such as the Hummer.

Paul Krugman, Nobel-winning economist and newspaper columnist, compares the American crisis to the dark days of the 1930s. That was the time of the Great Depression, when that country was gripped by a run on banks, loss of jobs, and soaring crime.

But we haven't seen such scenes this time around, or have we? "Instead of mobs in the streets… it was mobs in cyberspace clicking on mouses," said Krugman, in a Newsweek interview.

While workers lose jobs and investors go broke, the guys in the middle, the investment bankers who gave 'expert' advice, have collected their bonuses and retired to their penthouses and private islands… That's what a shattered America is saying. Obama is inheriting a severely injured economy, and not many believe he can make it fly in a hurry.

This is no time to gloat, as many at the lowest rungs of the employment ladder in India are losing their jobs, but the world may yet learn some lessons from conservative, old unfashioned India: Don't spend more than you earn. Don't borrow, but if you must, do it wisely. Don't gamble with your life savings and pension funds. And the hardest lesson: Don't trust the private sector for everything.

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