Touched by sub-prime America

One of the more interesting session was on the broad theme of ‘Power Equation: Implications for India’, with speakers like Mukesh D. Ambani, Senator Robert F. Bennett, Stephen S. Roach, Anand G. Mahindra and Hector de J. Ruiz. Not surprisingly, Senator Bennett was deeply concerned that at a time when the US economy was passing through significant uncertainties, perceptions mattered even more than reality. Repetitive themes by some TV commentators that jobs in the US were being stolen by India and China only reinforced a growing protectionist lobby. In today’s context, economic anxieties, more than even Iraq, were uppermost in the mind of the US electorate.

Ambani (described by Schwab a kind of ‘superpower’ himself) took a more optimistic view, believing that in the evolving perceptions geo-economics was beginning to matter more than geo-politics. The Indian developmental model, which combined poverty alleviation within a democratic fabric, was finding increasing favour even though the challenge for providing 100 million jobs over the next five years needed both innovation and technology for happy outcomes. Contrary to the concerns of Senator Bennett, Mahindra felt that Indians were not perceived as being overaggressive and generally more acceptable.

Roach definitely shared the pessimism of Bennett and felt that the US was not already in recession but was heading towards it anyway. It had in fact become a sub-prime economy with property values comparable to 1993 — a most unhappy year.

Unlike other analysts, Roach definitely believes that the de-coupling of Asia and the US was far less than was commonly accepted. Given the preponderance of numbers, the contagious effect of the US slowdown would be deep and widespread. In response to a question from me, Roach clarified that even though India has become more interdependent with the global economy, with exports now constituting to 20 per cent of its GDP, the contagion effect would be far less for us than for others. The most exposed was Japan and their high-export dependence makes them very vulnerable. The Chinese rate could come down from 11 per cent to 9 per cent and this, therefore, needed significant replacement through rising domestic consumption. Europe, too, would be hurt and it is not clear for how long and how deep the contagion effect could last.

Mukesh brought out that demographics and the aspirational thrust of the young would drive growth undeterred by high energy prices: the per capita energy consumption in the US was 20 barrels, the global average five barrels, and India’s just one barrel. On equity consideration alone, there’s a long way for India to go.

It’s ironic that the US, a “sub-prime economy” in Roach’s words, still continues to have a dominant superpower role in driving global growth. It remains debatable how much is India isolated from these global trends. The ingenuity of exporters in overcoming the handicap of the appreciating rupee has reached limits. In an economy where job creation is both social and political necessity, restoring jobs in gems and jewellery, textiles and leather will engage policy makers. An interventionist approach to contain rupee appreciation will require ingenuity to prevent negative market signals.

Even the so-called sub-prime economy has far reaching global implications after all.