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BUSINESS
US
sub prime mortgage crisis affects Indian economy
By
Devajit Mahanta
According to the encyclopedia, the sub prime mortgage crisis is an
ongoing economic problem that became more apparent during 2007 and 2008,
and is characterized by contracted liquidity in the global credit markets
and banking system. The downturn in the US housing market, risky lending
and borrowing practices, and excessive individual and corporate debt levels
have caused multiple adverse effects on the world economy. So far, the US
presidential candidates have made few helpful remarks about the crisis
other than the usual slogans. Republican Party presidential candidate John
McCain said “the foundation of our economy” was “strong,” adding that he
opposed a government-led bailout of US insurer AIG. But now he’s
promising further government steps “to prevent the kind of wild speculation
that can put our markets at risk.” But Democratic presidential hopeful
Barack Obama didn’t move past superficialities, either. “We’re Americans.
We’ve met tough challenges before and we can again.” What else are they
supposed to say? After all, US presidents have very little influence on
stock markets.
A US
financial crisis has severely curbed the availability of credit to
businesses and consumers. The foundations of US capitalism have been
shattered. Since 1864, American banking has been split into commercial
banks and investment banks. But now that’s changing. Bear Stearns, Lehman
Brothers, Merrill Lynch – overnight some of the biggest names on Wall
Street have disappeared into thin air. The key questions are, how deep will
the downturn be, when will a recovery get under way, and how strong will it
be?” Month of September has witnessed a series of US bank
failures, government bail-outs and emergency acquisitions that has sent
stock markets plummeting and caused remaining banks to horde cash out of
fear of a similar fate. The only thing that is certain is that the era of
the unbridled free-market economy in the US has passed – at least for
now. The Indian stock markets also crashed due to the downturn, with the
BSE Sensex dipping by nearly 13 per cent in just two trading sessions in
January this year. The Congressional Budget Office estimated that 279,000
people lost their jobs due to Hurricane Katrina and America’s
mortgage crisis has spiraled into “the largest financial shock since the
Great Depression” and there is now a one-in-four chance of a full-blown
global recession over the next 12 months. President George Bush has already
signed off a $150bn tax rebate package to kick-start the economy, and the
Federal Reserve has backed an emergency buyout of investment bank Bear
Stearns, but this may still not be enough: “Room may need to be found for
some additional support for housing and financial markets.”
The economic slowdown in the United States has already had
some impact on the Indian market. The rupee has been strengthening against
the dollar for over a year now, causing worries for Indian exporters. The
New Year and Christmas fervour in Goa and other foreign tourist
destinations in India
are likely to dampen this year, as a result of the financial crisis that
has hit the US.
The inbound tourism in India
will slump by 20-30 per cent in 2008 compared to last year. As the fears of
recession in the US
and European economies mount, travel and holidays would be the last
priority on foreign tourists’ list. The crisis in the US
financial market will hit the Indian real estate sector hard. The sector
was already reeling under tremendous pressure as RBI increased the interest
rates to contain inflation besides restricting the fund flow in it. The
fund flows from all the possible ways are getting constrained. Funds from
banks are already not available. Private equity source has also dried up.
And the demand from end users is also getting affected. However, as the
crisis widens in the US,
the companies, including outsourcing units and IT entices that heavily
depend on their overseas clients for getting their revenues, may get
affected in days to come. The sub prime crisis may lead to a slowdown and
then to a recession in the US
economy as well as it has affected third world countries like India’s capital
flight.
Readers can send their feedback at devajitmahanta@gmail.com
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