Even if you are cautious while investing, in an integrated world, events in one part of the word  will influence the whole world.  Few clever people turned their shares into cash as soon as the meltdown started and others are now hanging on to some worthy and some useless electronic share certificates.

This decline is not limited to stock market alone but has spread everywhere.  Be it real estate, increasing prices, inflation, liquidity crisis, decreasing jobs…  There is darkness everywhere.

Common man might be thinking that terms like economic slowdown or credit crisis will not affect him. Losses in stock market will not only affect the investors. It will affect the whole economy. If markets are down, capital raising will slow down which in turn effects production of goods and services and standard of living will stay where it is. For example:  Metro Rail project in Hyderabad is not able to raise funds in the market. Economists are predicting a depression similar to that of 1929 ‘Great America Depression’.

But the difference is, in those days economies weren’t integrated and countries weren’t dependent on each other.  But today we can’t look at any countries economy in isolation.  Nokia based in Finland sells more than 50% of it’s mobiles in India and China.  If there is a slowdown in India and China and Nokia exports decline, it will have a major impact on Finland.  Infact , in the current crisis it’s the export oriented nations that are hurt most.  In a way India is protected as most of the goods and services produced are for self consumption.  It’s only the software market which exports services to other countries that has suffered most in terms of loss of business profits and jobs.

One thing that Government, regulators should keep in mind is that we are rapidly opening our economy to outsides increasing the risk of external events affecting us. In 2002, Inida received foreign investment to the tune of 1200 crore dollars while it has gone up to 11,000 crore dollars in 2007. With so much investment coming in, share markets went up and up, real estate boomed. After that we know what happened. 

America sneezed and the rest of the world caught cold.

When markets fall FII’s are the first ones to withdraw money. In the last 2 days alone Europe based funds have sold more than 12,000 crores worth of securities due to the redemption pressures they are facing. How can you explain a decline in SBI stock price when it has announced an increase of 40% in its profits?  FIIs are selling in crores and taking back their investments.  That’s the reason for weakening rupee.  It has almost touched Rs 50 and I will not be surprised if it touches 54-55 in another 6 months.

What should be done?

Government should have foresight.  Our Prime Minister, Finance Minister, Central Bank officials are all economic experts. They should decide on how much foreign investment should be allowed and what should be the level of disclosure or transparency for the money that is coming from outside?

If they had done this earlier today Indian stock markets would not have fallen so much.  Again, I am not against foreign money coming in.  All what I am saying is that there should be a mechanism to avoid hot money that just flows out at the outset of a crisis deepening the crisis further.  I agree that growth rate will slowdown bit but  slow progress is better than a rapid progress and equally or even faster decline.

There should be growth in any economy.  But it should be gradual and not at lightning pace. If the market hasn’t grown so rapidly, common man would not have put his money in it in haste and would have avoided the current blow.

 Government should focus mainly on

1. Inducing some confidence in the system, reducing inflation and strengthing rupee.

2. Strengthing the banking system further so that it will not collapse like the other foreign banks.

3. Growth rate has slipped to 6.5 % from 8.5%. Demand is already reducing. Since private consumption won’t be much, government should spend heavily on infrastructure projects which will propel demand.

4. Should reduce government expenditure wherever possible.

While the pundits have opined that US economic slowdown will continue for another 2 months, it will be a real test for Indian regulators and Government to keep the economy on growth track.

On this occasion of holy Diwali I pray the almighty to lead us from darkness to light

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