Tuesday, January 6, 2009


The mainstream media in India have been turning tabloid for years, and the crises of recent weeks pushed their irresponsibility quotient up many notches. I was stunned last night to find a long discussion on CNN-IBN about whether India should emulate Israel’s response to Hamas rocket attacks. In other words, should we deal with Pakistan the way Israel is currently dealing with Gaza.

I will return to the specific issue of Israel-Gaza and India-Pakistan in a bit. For the moment, let me examine the media’s love of copycat formulations. A great example of this was the reaction of Raghav Bahl, Managing Director of India’s biggest business channel CNBC TV18, to the market crash of October 2008. Bahl suggested that interest rate cuts and stimulus packages were no way to tackle the crisis. What was needed was a “big idea”. His own big idea? India ought to shore up share prices by creating a Sovereign Wealth Fund that would buy Indian equities.

‘Sovereign Wealth Fund’ is such a buzz phrase that mediapeople are dying to jump onto the bandwagon and take their country with them. Me too, they shout, my country should have an SWF too. If Kuwait and Taiwan can, why not us?

Now, anybody who knows anything about SWFs is aware they are created by nations running budget surpluses as a way of deploying excess money. Most such funds are employed by countries whose economies depend on a single commodity. The investments serve as a hedge against the potential drop in price of that commodity.

India does not depend on a single commodity. More importantly, it does not enjoy a budgetary surplus. It has run large deficits for decades, the reining in of which has been one of the main challenges for successive administrations.

As for Bahl’s suggestion that we buy shares in Indian firms with this wealth fund, the purpose of SWFs is to acquire assets abroad. Purchasing in the parent country would defeat the primary goal of such vehicles.

Bahl suggested in an interview on his own channel that we dip into our foreign exchange reserve, sell 20 billion dollars worth of US treasuries, and use the money to buy shares. His interviewer politely suggested (I give him credit for this, since Bahl presumably has the power to fire him) that selling foreign exchange reserves would be unwise because, no matter where India takes the money from, it would add to its deficit, reducing its creditworthiness. Since the forex reserve is used as a marker of a country’s ability (and the ability of corporations within that country) to pay foreign obligations, lowering our reserves would immediately impact our credit rating. The cost of accessing funds abroad could rise for Indian firms, potentially negating any positive effect that shoring up share prices might produce.

Bahl replied: “If one doesn’t arrest the secondary price damage in the economy today, the equity capital formation will be gone and the GDP growth will be seriously jeopardised, and that is a fundamental downgrade. This is only a financial rejigging of the balance sheet of the country, temporarily, and I am not saying do this forever.

The US stepped in and picked up USD 6 trillion of gross Fannie Mae and Freddie Mac assets. It is a temporary measure. They are not going to be holding that forever. Why cannot our policymakers, given the cornucopia they have in their hands, go out and do that.”

Hacking our way through the jargon, we spot Bahl’s second copycat formulation. The first, remember, was: Kuwait and Norway have sovereign wealth funds, why not us? Answer: we don’t run a surplus and our government does not receive commodity-related windfalls.

Now the argument is: The US bought distressed assets, and provided bailouts, why can’t we? Well, consider the position the US was in. Its mortgage network was on the verge of collapse; the banking system was like a swimmer with cramp waving frantically before disappearing underwater; two of the ‘big three’ car companies were weeks away from running out of cash and filing for bankruptcy. Most people agreed the nation was facing its worst financial crisis for seventy years.

Compare with India. Is our financial system under threat? No, our banks are well capitalised and conservatively run. Is our mortgage market in danger? No, virtually all borrowers are able to pay back their loans because Indian banks never offer subprime clients easy money. Is any major Indian company about to go bankrupt? No, our big companies are, in general, financially healthy, and will be able to weather comfortably the fall in price of their shares. Is India looking at a painful recession? No, while the economies of dozens of countries, including the US, have begun to shrink, the worst case scenario for India in the absence of further global shocks is GDP growth of about 6% for the financial year 2008-09 and 4% for 2009-10. What if there are further global shocks? We'd be in deeper trouble, but buying 20 billion dollars worth of shares wouldn't help us weather that in any case.

You might recall that, in early 2008, India offered a bailout package of its own. It wrote off small loans that public sector banks had extended to farmers. The move was, without doubt, made with an eye to the general election of 2009. But it was also a reaction to the real pain millions of farmers were feeling. The loan waiver attempted to redress in some measure the enormous imbalances of wealth within the country. These imbalances have always existed, but the gap has grown substantially while India’s economy boomed these past years.

When the policy was announced, CNBC TV18 was full of experts deriding the measure, cursing government handouts, invoking moral hazards. A few months later, the head of the same channel argued for government support to the 2% of Indians affected by share movements, the same 2% who’ve been making money hand over fist for four years while markets scaled one peak after another. Moral of the story: subsidies are fine as long as they are given to the rich.

No comments: