Will India be any different?

Wed, 10 Feb Pre-Open

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Dubai crumbled under the pressure of debt for its multi storied towers. Greece, Portugal, Spain and Italy are giving creeps to investors in Eurozone thanks to their possibility of sovereign default. Unlike the US' twin deficit, China's twin surplus is not letting the dragon economy breathe any easier. The country's excessively overvalued property markets are challenging its super power status in world economy. The US' multi trillion dollar deficit is expected to ruin global growth prospects given the magnitude of pullback. Thus taking a call on the economy is best left to speculators these days. What investors can do is to check if the regulators are not sleeping over the problem.

Indian investors need to keep an eye on three of them. The RBI, which more or less regulates and supervises all Indian financial markets. The SEBI, which controls the capital markets. And the Ministry of Finance, which is the government's arm for formulating and executing policy matters related to the broader economy.

Each of these regulators needs to ensure that India does not repeat the mistakes made by its peers in the West and China. Growth based on easy liquidity works well when the nation's debt is fairly low and economic growth is relatively strong. But exponential debt financed growth becomes an increasing concern every time you print your way out of an economic downturn. Thus the RBI has in recent past and will in future need to stay independent in its views with regard to monetary tightening. In fact, it needs to stress even more on tightening the government's borrowing budget.

The central bank also needs to adopt a stricter stance with regard to allowing sops to sectors that have misused the sops. The realty sector is a case in point. The RBI has already refused further restructuring of loans to this sector. In effect, it expects realty players to stop holding on to projects with the intent of driving up prices.

The SEBI will need to ensure that money without the intention of long term investment in the economy does not remain a frivolous guest by way of participatory notes (P Notes). The Finance Ministry's decision to keep the issue of taxing P-Notes on the back burner for now does not go well with this intent. Capital controls, if and when needed, will have to be put in place in coordination with the RBI to ensure stability of the currency.

The larger the downturn, the larger is the response. If the recovery period is not used to pay down debts the problems can become exponentially worse. Thus as suggested by the Finance Ministry, India needs to immediately start unwinding its stimuli to ensure than inflation does not rear its ugly head. Going back to the FRBM (Fiscal Responsibility and Budgetary Management) targets seem most apt at this time. Unless checked on time, the problems faced by the heavy indebted governments could soon dawn upon India as well.