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BUSINESS
Will India’s
bailout package ease global finance crisis?
By
Devajit Mahanta
Before we digest the process of “bailout”, we must first of all
explore its meaning. In economics, a bailout is an act of loaning or giving
capital to a failing business in order to save it from bankruptcy,
insolvency or total liquidation and ruin. It is like when some one is
heavily under debt and someone pays for him so that he can start afresh.
According to Bloomberg and Congressional Research Services (CRS), the US
Federal Government has made commitments worth a total of $8.5 trillion
(about Rs 42,50,000 crore) in the bailouts of 2008 which exceeds the
combined cost of every major war the United States has ever engaged in.
Back home in India, the closure decision of Tata’s Jamshedpur plant,
decision of Ashok Leyland to run only for three days a week for the coming
two months, decreasing interest rate, lowered REPO rate and reverse gear of
stock market compelled the Indian government to finally came out with an
economic bailout package of Rs 2,75,000 crore in December ’08 to restore
stability and growth to our nation’s financial crisis. This bailout seems
similar in nature as the Wall Street bailout practiced in America. If
the US’ $8.5 trillion package
has failed to boost the US
economy, can we expect a similar measure to prove fruitful for India? that
is the pertinent question. The stock market in India fell so steep that in
some cases the fall was about 10%. Had the bailout been a good one the markets
would have made a smart recovery. Fact is market is suffering from
deficiency in demand therefore deficiency in demand should be treated to
save both the economy and the investors.
A certain section of the Indian government pushed for a Rs 200-crore
package for scam-hit Satyam in the form of debt but it was turned down by
the Prime Minister and thereby made an unwritten rule that government would
not bail out a private company with the sole exception of banks. The
government justifies its interventions in the case of banks as the RBI,
which has ensured adherence to procedure, regulates it. A private company
competing in the market can’t be treated on the same plank as banks.
The trillion-dollar question emerging today is whether the bailout packages
by the Government will ease global finance crisis and what will happen to
the shareholders. Many of the companies and institutions which are
suffering due to the ailing economy are large, which means there is a major
need for management talent to run them. But why should the managements that
got these institutions into the positions they now are in be expected to
get them straightened out and healthy again? Also the shareholders have no
right to ask their money back because there is no equity left in these
institutions. Every shareholders’ and investors’ dream is to buy stocks and
watch the value of the investment grow. But what is clear is that when one
chooses to invest, there is the likelihood that he could lose some or all
of his money. This is the stark reality facing most investors and
stockbrokers in India
today as the market capitalism tumbled down since after November 2008.
Three things need to happen in order to resolve the crisis. First, banks
must figure the true value of assets. Second, they must raise more capital
and third, home loans need to be restructured. The government’s bailout
plan addresses the first point by establishing a price for hard-to-value
assets.
Overall in the world economic scenario, the year 2009 is starting in an
unprecedented way. US and Japan,
among the largest economies in the world, started the year with zero
interest rates. China
has opted for a $586 billion bailout programme, the largest fiscal package
in recorded history. In India,
the Reserve Bank of India
slashed basis points while the Sixth Pay Commission implementation has
greased the system a bit. The “Credit market crisis of 2008” is worse than America’s
great depression in the 1930s because the size of derivatives transactions
between counter parties was magnificently large.
Readers can send their feedback at devajitmahanta@gmail.com
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