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A Deep-rooted Problem

While India managed to escape from the crisis in 2008, we might not see the same happening in 2012…

My question is not related to mutual funds or equity markets; it’s about the Indian economy. I listened to some news where they said that there are talks in the UN that while India and China were able to save themselves in 2008, that might be difficult in 2012. I wanted to know what you can say about the same.
-Manohar Singh

Many people think that we won't be saved in 2012 like we were in 2008, because whatever had happened in 2008, the Indian economic situation wasn’t that bad. We were able to save ourselves by accelerating small government measures like the reduction and incentivisation of service tax, which helped us from not going into the kind of recession the world was facing. And also because that was a banking crisis, the banking sector held tough. The Indian markets were largely affected by FIIs pulling out a lot of money in a small period of time, but that didn’t have much of an effect on our economy.

But this time, the situation is quite different. The price of most of our inputs is quite high, corporate profits have fallen hard in recent quarters, inflation is high and a fall in expenses doesn’t seem likely. While we are not seeing de-accelerated growth, the profits of our companies are definitely going down, and in a short period of time, a lot of companies will face problems. There is no consolation or no change expected in 2-3 major cost heads, like rising interest rates, and critical imports getting costlier by 10-15 per cent because of the depreciating rupee. These problems will have an effect for a while. The economic cyclicality, the ups and down that we see will take 3-4 quarters to change. On top of that, companies will take 3-4 quarters to reconcile from rising expenses as well. Hence, the situation that was there in 2008 when the whole world was in a bad shape, but India had managed to escape, won't be seen this time and whatever is happening around the world will have an effect on us.

However, in the past 5-7 days, there has been hope of a turnaround. But the problem is deep-rooted and finding a solution is not going to be easy because the government doesn’t have the resources to handle a problem of such a scale. Additionally, this hasn’t been a sudden occurrence or an accident, so we won't be able to find an immediate, quick solution. Hence, this problem will have a prolonged effect on our economy.



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