By Adhvith Dhuddu
(Op-ed as appeared in the Hindu Business Line on January 13th, 2010)
A decade of boom and bust has culminated in a new set of global standards even as India's image has soared as a credible survivor of the financial crisis.
The first decade of the 21st century has been unprecedented in many ways with the tech bust in the early 2000s, the rise of the BRICs and other emerging economies, the commodity boom and of course, the global financial mess in the recent years. As we enter the last lap of this decade, there are many “new normals” that have been scripted in the Indian and global context.
There is a new normal in the global economic playing field: Regulatory shackles have resurfaced prominently in the western world and government is back amidst “free markets.”
Developed economies, led by the US, rewrote the rules of global finance during the crisis, which will have ramifications in the American, European and Asian continents. As countries, companies and individuals emerge out of this crisis, everyone can be sure that it's not going to be business as usual at least in the near future.
NEW FINANCIAL STANDARDS
In a recent article in The Wall Street Journal, JP Morgan CEO Jamie Dimon captured the new normal succinctly, when he welcomed the Obama Administration's proposals that “focus on strong capital and liquidity requirements — not just for traditional banks but for a broad range of financial institutions”. This quote is sufficient for an economist to conclude that the new normal (in the US) will mean: increased government intervention and oversight in the financial sector, significantly lower capital being available for new investments globally, diminished appetite for risky leveraging and sparse availability of cheap credit.
In addition to this, specific regulations requiring further transparency in key markets like derivatives, introduction of stronger oversight in hedge funds, checks and balances in the shadow banking system and stringent regulations for over-the-counter financial products are all consequences of the tectonic shift aimed at expanding governmental role in the US' economic landscape.
Understanding the new normals in the world's largest economy is crucial as many of their economic and financial legislations often have worldwide effects, thanks to the influence of global finance.
New global regulations, historic bailout packages, co-ordinated responses by numerous central banks and other sweeping actions taken during the financial crisis are guaranteed to have widespread affects. Despite the resilience and growing strength of the Indian economy, these drastic changes globally will significantly affect Indian business, trade and commerce.
CAPITAL CRUNCH
In the last few years, the ability to leverage gave institutions on Wall Street access to ample capital and simultaneously increased their risk appetite. The momentum built up in leveraging was felt across the globe as capital was pumped continuously into emerging markets and unconventional assets like commodities, complex derivatives, art, etc. But this financial fallout and massive government intervention has forced many firms to deleverage and use cash conservatively.
It is important to recognise that the accelerated growth our economy experienced from the early 2000s was driven to some extent by foreign investments, which are sure to dry up in the short to medium term. This is not because India is a less attractive investment destination, but because of insufficient capital and the inability to leverage available capital.
When investment banks, hedge funds and PE firms could access $1 billion with only $50 million in collateral (1:20 leverage), the $1 billion was distributed to India, China, Brazil and Middle East into equity, real estate, commodities and fixed income assets.
But in the post-crisis era, when the amount available is only $50 million (no leverage) or $250 million (1:5 leverage), any amount of distribution to emerging markets and asset classes translates to less capital inflows into India or other emerging markets. This credit crunch, or more appropriately, “capital crunch,” forces us to realise that there is less capital available.
INDIA'S PROSPECTS
Asset managers, financial experts and economists have realised that India was better insulated than many other emerging economies during this crisis. Not only has this cast away many apprehensions about our economy, but it has considerably altered how India is perceived at the global level.
This is definitely another “new normal” for India; our voice is perceived differently, it's respected in the global arena and India's say is not only a credible one but an influential one. The importance of this development is noteworthy, because something like this would have been impossible 10 or 20 years ago.
Finally, another significant “new normal” is the pressure on the local urban and rural markets to perform. It's important to recognise that the Indian consumer differs significantly from the US consumer; unlike the archetypal westerner, the Indian consumer is more of a saver than a spender and our economy is not credit-driven or consumer-driven, like in the US.
If India wants to continue growing at 8-9 per cent in the post-crisis era, where capital is scarce and expensive and leveraging is a thing of the past, our local markets, both rural and urban, must perform better than expected. If this doesn't happen and local demand doesn't gain momentum, moderate growth of 6-7 per cent can be expected in the next few years. The need for local demand to improve is crucial because, for the last decade, the true strength of the local market was overshadowed by rising overseas capital finding its way into India.
(The author is an asset manager based in India and the US)
Online link to this article: http://www.thehindubusinessline.com/todays-paper/tp-opinion/new-rules-of-the-global-marketplace/article975354.ece?ref=archive
(Op-ed as appeared in the Hindu Business Line on January 13th, 2010)
A decade of boom and bust has culminated in a new set of global standards even as India's image has soared as a credible survivor of the financial crisis.
The first decade of the 21st century has been unprecedented in many ways with the tech bust in the early 2000s, the rise of the BRICs and other emerging economies, the commodity boom and of course, the global financial mess in the recent years. As we enter the last lap of this decade, there are many “new normals” that have been scripted in the Indian and global context.
There is a new normal in the global economic playing field: Regulatory shackles have resurfaced prominently in the western world and government is back amidst “free markets.”
Developed economies, led by the US, rewrote the rules of global finance during the crisis, which will have ramifications in the American, European and Asian continents. As countries, companies and individuals emerge out of this crisis, everyone can be sure that it's not going to be business as usual at least in the near future.
NEW FINANCIAL STANDARDS
In a recent article in The Wall Street Journal, JP Morgan CEO Jamie Dimon captured the new normal succinctly, when he welcomed the Obama Administration's proposals that “focus on strong capital and liquidity requirements — not just for traditional banks but for a broad range of financial institutions”. This quote is sufficient for an economist to conclude that the new normal (in the US) will mean: increased government intervention and oversight in the financial sector, significantly lower capital being available for new investments globally, diminished appetite for risky leveraging and sparse availability of cheap credit.
In addition to this, specific regulations requiring further transparency in key markets like derivatives, introduction of stronger oversight in hedge funds, checks and balances in the shadow banking system and stringent regulations for over-the-counter financial products are all consequences of the tectonic shift aimed at expanding governmental role in the US' economic landscape.
Understanding the new normals in the world's largest economy is crucial as many of their economic and financial legislations often have worldwide effects, thanks to the influence of global finance.
New global regulations, historic bailout packages, co-ordinated responses by numerous central banks and other sweeping actions taken during the financial crisis are guaranteed to have widespread affects. Despite the resilience and growing strength of the Indian economy, these drastic changes globally will significantly affect Indian business, trade and commerce.
CAPITAL CRUNCH
In the last few years, the ability to leverage gave institutions on Wall Street access to ample capital and simultaneously increased their risk appetite. The momentum built up in leveraging was felt across the globe as capital was pumped continuously into emerging markets and unconventional assets like commodities, complex derivatives, art, etc. But this financial fallout and massive government intervention has forced many firms to deleverage and use cash conservatively.
It is important to recognise that the accelerated growth our economy experienced from the early 2000s was driven to some extent by foreign investments, which are sure to dry up in the short to medium term. This is not because India is a less attractive investment destination, but because of insufficient capital and the inability to leverage available capital.
When investment banks, hedge funds and PE firms could access $1 billion with only $50 million in collateral (1:20 leverage), the $1 billion was distributed to India, China, Brazil and Middle East into equity, real estate, commodities and fixed income assets.
But in the post-crisis era, when the amount available is only $50 million (no leverage) or $250 million (1:5 leverage), any amount of distribution to emerging markets and asset classes translates to less capital inflows into India or other emerging markets. This credit crunch, or more appropriately, “capital crunch,” forces us to realise that there is less capital available.
INDIA'S PROSPECTS
Asset managers, financial experts and economists have realised that India was better insulated than many other emerging economies during this crisis. Not only has this cast away many apprehensions about our economy, but it has considerably altered how India is perceived at the global level.
This is definitely another “new normal” for India; our voice is perceived differently, it's respected in the global arena and India's say is not only a credible one but an influential one. The importance of this development is noteworthy, because something like this would have been impossible 10 or 20 years ago.
Finally, another significant “new normal” is the pressure on the local urban and rural markets to perform. It's important to recognise that the Indian consumer differs significantly from the US consumer; unlike the archetypal westerner, the Indian consumer is more of a saver than a spender and our economy is not credit-driven or consumer-driven, like in the US.
If India wants to continue growing at 8-9 per cent in the post-crisis era, where capital is scarce and expensive and leveraging is a thing of the past, our local markets, both rural and urban, must perform better than expected. If this doesn't happen and local demand doesn't gain momentum, moderate growth of 6-7 per cent can be expected in the next few years. The need for local demand to improve is crucial because, for the last decade, the true strength of the local market was overshadowed by rising overseas capital finding its way into India.
(The author is an asset manager based in India and the US)
Online link to this article: http://www.thehindubusinessline.com/todays-paper/tp-opinion/new-rules-of-the-global-marketplace/article975354.ece?ref=archive
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