Reckless
leveraging to generate imaginary wealth by fake financial innovations, leading
to the present crisis has once again raised doubts about the credibility and
reliability of the credit raters and the global financial regulatory system, including the central banks of crisis
ridden countries. The subprime in the US
would not have permeated to the entire financial sector, but, the securitization
of home mortgage loans coupled with the flow of foreign funds into the US Fed
and the US
government sponsored firms like Fannie Mae and Freddie Mac, finding its way to
credit markets has led to reckless leveraging.
This reckless
leveraging out of foreign funds has fuelled a debt financed and import driven
consumer binge in the U.S.,
whereby the US
consumers could spend $500-800 billion over and above their GDP for last seven
years. Now, almost $3 trillion worth of mortgage backed securities in the U.S. and another $2 trillion worth of these
securities have gone sublime in Europe. In
view of such a huge meltdown out of incredible leveraging, a multilateral
regulatory regime has to be put in place to assess the asset base and sustainability
of securitization, absorbing global investments.
However, on the
macro-economic front in case of India,
the trade deficit might breach the $100 billion mark and the current account
deficit may touch 3.5 percent of our GDP, worse than 1991-92, when India had to
pledge gold with the Bank of England. Fiscal deficit might also touch 5 percent
of our GDP, double of budgeted target of 2.5 percent and 40 percent above the
limit of 3 percent fixed under the fiscal Responsibility and Budget Management
Act.
Now, when almost in all parts of the world, the
tremors of recession are being felt out of this crisis, a quicker turnaround
has to be ensured. In this regard, India should plan to channelise its surplus
savings to demand generating investments, instead of further opening up of the
financial sector (including the insurance), the educational sector and other
services for foreign direct investments. Indigenous resources, available shall have
to be channelised for fresh investments and demand creation, for sustainable
inclusive growth in the long run. 