The Worst is yet to come for India, say US Economist

By M H Ahssan

The recession in the US is likely to remain till the fourth quarter of 2009 or the first quarter of 2010, and India too will be affected by it as the two countries are ‘joined at the hip’, said a leading US economist.

James R Barth, Senior Finance Fellow at Santa Monica-based Milken Institute, was in Hyderabad to talk about the current financial crisis and possible solutions. Taking part in a press roundtable, Barth traced the genesis of the crisis in the US and its impact on India.

Stating that the crisis was triggered by the housing price bubble, the economist said, “low interest rates in adjustable (variable) loans led to a boom in the housing sector. By the end of 2006, 69 per cent of the US population had homes. Housing prices shot upto levels seen only once before, after the Second World War.”

But soon, the bubble burst. “Of the 80 million houses that were bought during the period, 53 million houses were bought on mortgage. And only 10 per cent of these were behind payment or defaulters. Very soon, housing prices crashed and fell by 20 per cent across the US and even by 30 per cent and 40 per cent in some cities,” Barth said.

According to the expert, uncertainty is the biggest enemy of a well-founded democracy. “You know it is going to happen but are not exactly sure as to who will go down next,” he said. Barth maintained that the mortgage funds in the US were highly regulated, though the same could not be said of the hedge funds.

Referring to India, Barth said the worst is yet to come. “China opened up its market in 1977, but was done very selectively. As a result, China’s share of GDP grew. India, on the other hand, has not yet opened up fully, and as a result, its GDP has been flat. The point is openness per se is not bad, but one does it is what makes the difference,” he said.

According to Barth, since India and the US are joined at the hip, the financial crisis will hit it soon. “Exports are down, stock prices have fallen and so has home prices. All this means that consumption will go down and there will be a decline in general economic activity,” he said.

Referring to the impact of the financial crisis on India’s outsourcing boom, the economist said ‘offshore outsourcing’ may get hit. Many companies having their offices in India but headquartered in the US may cut back on costs. But in the long run, the future is in the hands of the global players,” he said and concluded that terrorism will only act as a temporary setback to foreign investment in India and not cause any permanent damage.