Global Financial Crisis: Effect on India

With the demise of Enron and Worldcom, the world saw American business executives going to jail and Accounting firms discredited. Now, we are witnessing American Credit Rating Agencies and Government Regulators being discredited. Investors, large and small, have willingly risked their hard earned earnings on advise from these 'independent agencies', the three pillars: Rating Agencies, Accounting firms, Regulators. Now there is nothing left.

The impact of this 'Trust destruction' will reverberate for many years, and it will affect countries everywhere.

There have been market crashes, recessions, depressions, runs on banks, bankruptcies of countries....in the last 40 years we have participated in an incredible array of financial crises from the oil shock, LDC crisis, 21% interest rates in 1981, commercial real estate debacle, 1987 and 1991 market crash, asian currency crises of 1999, dot com bubble bursting..and so on. However, in none of those events was confidence in the pillars eroded...now it is in shambles. We rose up from the earlier crises stronger than before, however, this time the very pillars have been demolished.

For countries like India which are in need of capital to intiate projects to build infrastructure the situation has grown grim. Certainly, the developed world investors will be wary...they will not trust their advisor, as they have no independent sources of comfort... hedge funds will be scrutinised and will be made scapegoats since they have no effective power source. India specific funds will become a scarce commodity. Sovereign wealth funds may be a source of capital; however, we would have to prohibit them from investing in sensitive sectors such as Ports, Telecom, Power generation, ....the very sectors where the monies are required.

This drama of capital inflow drying up will take years to play out...we can expect the following in India:

1. Business built on the out-sourcing phenomenon will suffer...a darwinian struggle will ensue and stronger, bigger and more efficient firms will emerge....job losses will be legion.

2. Financial firms which have levered themselves to a sharply growing economy will suffer...NPA's will rise on personal loans as well as home loans.

3. Real Estate firms will also enter a Darwinian struggle...those levered for high growth will die...those focussed on customers will thrive...consolidation will occur.

4. Every business house has created either an infrastructure subsidiary or a telecom subsidiary. If the money is already committed, it was done at the peak, and will be lost. If it is just an idea then they may reap huge rewards when the cycle turns in the next year or more.

5. Export oriented businesses are in trouble despite the weaking rupee. The consumer in developed markets has been hurt very badly and there is much more pain to come. Demand destruction is palpable.

6. These troubled times will force consolidation in the financial sector; we cannot fund our infrastructure and business growth with our tiny banks. We need banks of size to finance gargantuan loans with government backing. Given the shrinking capital inflows there will be no other choice left but consolidation...the scale and size of this consolidation will be unprecedented and job losses and labor strife will ensue for some time.

To conclude, if the United States loses $5 trillion in this crisis, its balance sheet will still be stronger than every other major country in the world. The problem is not just money and losses; it is the discrediting of Accounting firms, Rating agencies and Regulators that will haunt this post Crisis world. I do not know what form the future 'Independent Agency' will take, but I will not trust anyone for a long, long time. And I am not alone.