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Indian Director of housing finance on global economic crisis & it’s impact on India’s economy

Friday 11 November, 2011

Shri. K. Narasimha Murthy, an Independent Non-Executive Director of LIC Housing Finance Limited,  (who looks like an accountant by trade), stopped by the GITAM campus to talk with our Institute of Management students on the global financial crisis & it’s impact on the Indian economy.  He opened by noting that most Indians don’t know academics well, & the importance of the economy, & then equated public finance with life.  In 2008, he lectured about the US housing scam & overt greediness to no avail.  That was compounded by Bush bombing Iraq & spending $TR without the financial muscle to back it up.  Everyone just accepted it which led to a vested interest in accepting it.  That was followed by skyrocketing oil prices, which then affected the bond markets.  When the world runs out of gas, literally as well as figuratively, money stops moving.  US manufacturing companies were importing far less.  Americans have forgotten how to work hard & save.  American culture is in bad shape.

Murthy traveled to London during that time.  When he landed @ Heathrow, he found the airport deserted & becoming somewhat dilapidated.  He saw old cars plying the streets.  The UK doesn’t work much anymore either.  Little is made in Britain anymore.  The manufacturing & work culture are gone.

That US debt is greater than its GDP is a problem.  America’s lower debt rating lowers its borrowing capacity, which increases its costs.  Murthy thought Obama’s job plan was great.  He noted that only the poor are now taxed while the rich are not.  There are structural defects in the US tax system as well as a cultural defect, but no one can control the US

Many years ago, John Maynard Keynes postulated that, along with the Bretton Woods system, if imports &/or exports became greater than 10% of GDP, they should be taxed, so as not to create the massive imbalances we have today.  He also suggested the use of SDR’s (Special Drawing Rights) to settle international accounts rather than any specific reserve currency, which the US$ has become.  China now holds US bonds which have no value.

Greece is now writing off 50% of its debt, which will lead to the value of recapitalized banks falling.  India is being asked to support the European Structural Stability Fund, while France, Italy, & Spain are next in line with problems.  Subsidy development has killed Europe & the US.  The debt/GDP ratio is far too high for France, the UK, Italy, & even Germany.  If Greece isn’t fixed, the Eurozone has a big problem.

India’s saving grace is its 37% savings rate.  Most internal debt supports the government.  He told the story of a modest India woman who lived on 60% of what she earned & stashed away the rest.  The west borrows to buy imported goods, which leads to massive trade imbalances, an indicator of no fiscal discipline.  We simply mint more currency to pay for things, but you can’t change cultures easily.

But in India, inflation is up & unemployment is hovering @ 11-12% while the rupee is depreciating & trade deficit is growing.  India has a structural problem that its farmers, 50-60% of the population, only contributes 17% to GDP.  48% of Indians live below the poverty line as the span between the haves & have-nots keeps expanding.  Inflation is simply too much money chasing too few goods.  The government is an example of unproductive wages when it shows no control & fiscal discipline.

While foreign-based Indians are returning to India, India’s low productivity levels still must be raised.  India is the #2 or #3 producer of many commodities, but doesn’t see the fruits of its labors because of low productivity.  Its current account deficit fueled by oil imports are a problem.  Earlier, Indian workers were required to deposit 10% of their salaries in government accounts.  India’s financial authorities just need to suck the excess liquidity out of the financial system & not raise interest rates, which have been raised numerous times in the last year.

Q&A

  • Generally our risk management systems failed, along with our ratings & predictions.
  • Good governance leads to good economics, so pray for good people in government to better align the central & state governments.
  • The antidote to rising prices is increasing productivity, which requires political willpower.  Reducing inflation is a function of the public expenditure system.
  • The reason governments can’t/don’t implement what theory would dictate is populism-they’re not able to make any reforms for political reasons.
  • The financial dip in India has hit the middle class & youth the hardest.  The drawback has been investment outside of India while the rupee depreciates, resulting in falling foreign direct investment.
  • Keynes said government spending will help lead to growth, but that also depends on capacity.  The socialists are not productive, so a mixed system like India’s is best.
  • We can all change to get back to work & bring India’s black economy back into the real economy.
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