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Thursday, October 2, 2008

Effects of the US Financial Crisis in India

Dear Readers,
It is often said that when the US sneezes the rest of the world catches a cold. This
three-part series looks at how India, China, and Russia have been affected by the US
financial crisis. Before we get into detail about how much this US problem is spreading
globally, we should understand the severity of it and the possible consequences in the
US. How sick is the US? Some have compared the situation in the US with the Great
Depression of 1929, but this situation is far from a depression – in fact it’s not even a
recession. In the Great Depression there was no work and there was widespread
poverty. People struggled through the winter with no heating and no food. We are not
seeing such extensive suffering in the US. In the US, August 2008 unemployment
figures were at 6.1%, according to the US Bureau of Labor Statistics. In the Great
Depression unemployment was higher than 25%. The Commerce Department reported
that GDP growth was at 2.8%, hardly indicative of a recession, although this was
revised down from the 3.3% figure it projected a month ago. But one cannot ignore
yesterday’s 777 point drop in the Dow Jones Industrial Average after the $700 billion
bailout plan failed to pass through Congress. These paper losses of more than a trillion
dollars may be the sneeze that disrupts global markets. Even before this controversial
rescue plan was shot down, Indian markets took a dive of their own on Monday 29
September. The stock market sank to an 18-month low and the rupee a 5-year low. The
stock market dropped 5.3% to 12,595.75. According to Business Standard, vice-
president of Karvy Stockbroking Ambareesh Baliga, said, “We are advising our clients to
stay away from trading till selling by Foreign Institutional Investors (FIIs) stops. Also,
there is no support to the markets from any domestic institution. While markets are
below their fundamental levels, fear has gripped investors and there is panic selling.”
While US investors and consumers are concerned about who will foot the bill for this
$700 billion plan, to Indian and non-US markets that doesn’t matter. They just want it
to happen so as to restore confidence and of course liquidity. reported Jagannadham Thunuguntla, head of the Delhi-based SMC Group

saying, "The first major point of nervousness is that the US bailout plan will now be in
three tranches of $250 billion, then $100 billion and finally $350 billion and the second
and third tranches will require further Congressional approval. This means effectively,
only $250 billion is now available for buying troubled assets of banks instead of $700
billion outright. This doesn't really solve the problem of liquidity." Crowds gathered
outside the Bombay Stock Exchange to watch the markets drop, with many investors
angry. Why should failure of the world’s most advanced financial system hurt individual
Indian investors? But the fact remains that the “Bush administration's failed economic
policies” as speaker of the House Nancy Pelosi described it, is everybody’s business.
Posted by Amit Jain at 3:49 AM