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TheSubprimeCrisis ImplicationsforIndia
Howoftenhaveweusedthewordsubprimeinthelastoneandahalfyears?Well,the
Americansseemtohavecaughtafancyfortheword.Theylovethewordsomuchthat
ithas
been
voted
to
be
the
word
of
the
year
2007
by
the
American
Dialect
Society.
This
euphoriaandinterestinthewordisjustifiedtoagreatextent.Afterall,itisthecauseof
themanyworriesoftheAmericansandprobablytheentireworld.
Subprime,asthewordsuggests, isanythingthat isnotprime.
Inthesubprimecrisis
context itsimplymeans lendingmoney tosubprimeborrowers i.e.
lending topeople
withloworpoorcreditworthiness.Muchthoughtandenergyhasalreadybeenspentin
theliterature
in
understanding
the
causes
of
the
sub
prime
crisis.
Thus
we
shall
not
delve toomuch in to it in this article. Toput it very simply the
subprime crisiswas
causedbecause the lendingnorms in theUSAwere very lax. It
isjokedabout in the
academiccirclesthatanymanwhowasnotonarespiratorwasgivena
loanwithout
any regard to his or her creditworthiness. This was brought
about by the Spend
yourselfoutofthepostdotcombustrecessionpolicyoftheAmericangovernmentat
thattime.
Theend resultof the subprime crisis ismanifesting itself
inmyriadways.Thereare
directandindirect
implicationsnotonlyfortheUnitedStatesbutfortheentireworld.
LetusbrieflytheeffectsofthiscrisisontheIndianeconomy.
Firstly, the subprime crisishas led tonear lossof confidence in
theAmerican Stock
Markets,andthishasaccentuatedthecreditcrunch.Manybig
investmentbankshave
beenbroughtdowntotheirkneesandmanyothersarefindingitextremelydifficultto
stayontheirfeet.InordertoconsolidatetheirrespectivebalancesheetsintheUnited
States,thesebanksareunwindingpositionsindevelopingmarketshencecausingdown
swinginthesemarkets.Asimplecaseinpointwastheintraday1400pointsfallonthe
BSEinJanuary2008thatwasbroughtaboutbyCitiBankunwindingitspositioninmany
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front line stocks in India. The sub prime that was brought upon
by the American
financial system upon itself is spreading its tentacles around
the world. People who
were not even remotely connected with the sub prime crisis are
being adversely
affected.
Secondly,thenearrecessionsituationintheUSAhasledtoalossofdemandforIndian
exportshencelossofexportearningsforIndia.TheAmericansareknowntolivebeyond
theirmeans.However,onaccountofthesubprimecrisis,alltheirsourcesofcredithave
driedup,and
theyarebeingforcedtocutdownontheirexpenditures.Thusdemand
forimportsisfalling,whichimplieslossofrevenuesforcountrieslikeIndia.Notonlyis
therea loss in thegoods sector,but the IT sector isalso feeling
thepinch. Software
developmentfor
many
US
firms
takes
place
in
India
but
as
the
American
firms
are
facing
aneconomic slowdown, theyaredemanding less ITproducts, leading
toa fall in the
growthrateoftheIndianITsector.
Thirdly,investmentbanksandotherfinancialinstitutionsareonajobslashingspreeto
cut costs.Thismeans thatmanyjobs in Indiaareat stakebecause
these institutions
have theirBPOs in India.So the firstjobs togowillbe the lowend
IndianBPOjobs
leadingto
increased
unemployment
in
India.
Fourthly,therewillbeseriousimplicationsforthebankingsectoraswell.Thesubprime
hasmeantthattheIndianbankshavetofollowstricternormswhiledisbursingloansto
thepeople.Thesetighternormscouldprovetobecountercyclical.Theargumentisthis
peoplewillbeaskedtoprovidecollateralforthe
loansgiventothem.Anybodywhois
unabletofurnishthecollateralwillbedeniedaloan.Thispolicywillexcludeamajority
ofthe
population
from
institutional
sources
of
credit,
thereby
affecting
growth
negatively.
Fifthly,thereisariskofthefinancialcontagionspreadingtotheentireworld.Firmslike
BearSterns,LehmanBrothers,MerylLynchwhoonceinspiredconfidenceamongstthe
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investorclasshavenowgonebust.OthergiantslikeCitiBank,MorganStanley,andAIG
havebeenshakenfromtheirveryfoundations.FreddieMacandFannieMaeareunder
theconservatorshipoftheUSgovernment.Therisk
is,thus,thedominoeffect. Ifone
morebigfinancialinstitutionfailstherewillbeacollapseoftheentirefinancialsystem
ofthe
USA.
Inretrospectwecanconcludethatdueto
increasedfinancialintegrationoftheworld,
risksemanatinginonecountryarebeingtransmittedtoothernations.Thereisnodoubt
that the financial system of the entire world is under great
strain. The first of the
dominosby thenameofLehmanBrothershas fallen.Thepolicymakersare
tryingall
that theycan to stem the fallofanymoredominos.Only timewill
tellwhether they
succeedin
their
endeavour.
Time
is
running
out
and
the
policymakers
can
not
afford
to
fail.
AnandShankar
IInd
Year.
MScFinancialEconomics
MadrasSchoolofEconomics.
