Unsustainable-Part 2

I picked this topic because I would like to put forward my views on the huge public debt this country(through banks) is forcefully creating. More succinctly, the government no longer needs money from banks and hence the banks are flush with funds. Now the prime role of the banks is to lend to various sectors of the economy and foster growth thereby also ensure that the economy is well insulated and healthy. Now RBI has to make sure the latter is ensured since the banking sector has been well privatized. The banks are not as cautious as the RBI since keeping funds idle is a sin for banks. The government insists that banks lend to the agriculture sector which is limping. Also welcome is lending to real estate sector which will indirectly aid development is so many interdependent industries. But now the banks are lending home loans enormously and what I would call unsustainably in the long run. Lending to agriculture sector always happens forcefully and rarely voluntarily!

The RBI has recently tried to curb risky loans to the commercial real estate sector with indication to banks of a possible threat that looms around home loans too! The repo rate hence has been slightly raised by .25. Dayanidhi maran a few days back had warned the realtors of falsely rising valuations in areas like coimbatore, madurai after Chennai! .

So going forward all these will definitely have impact on the inflation and cause an increase in domestic products. It’s very important that in a Globalised economy falsely hiking prices is prevented in all products so that for the public various essential commodities don’t become too costly. Such situations will drive towards a possible alarm and demand an immediate action from the regulator and perhaps force him to take strict measures. And will possibly induce a passive recession.

After all one might even travel in a highway but will have to slow down when there is an accident that’s happened before him!! :)

Unsustainable

Unsustainable

I want to start this article with information I heard from my father. Few years ago in the pre 90’s India had a considerable shortage for foreign exchange (dollars primarily). During that time people who went to study in US had to get foreign exchange approved by the RBI for them to travel abroad. One such candidate with pretty ordinary academic merits applied for proceeding to study in US and was rejected with reasons being stated that his credentials were far below the acceptable ones and, more so relatively with other candidates. But later this guy managed to politicise the issue and finally did finish his studies and come back to India and is now none other than Mr. Chidambaram himself, the finance minister of India :)

Until the twentieth century the Indian economy operated quiet predictably and to some extent even sluggishly! The government invited savings from people which went to banks and the bank lent to the government, convertible into securities and got a good interest for it as well which it shared with the public. And heights, for some period of time , even the government forced banks to invest a percentage of the savings raised from public in securities. The money was used in capital expenditure and the economy kept following the snail without overtaking it.

But globalisation started changing things, and luckily for India population turned to be an advantage. For two reasons, services industry could operate well here and hence came outsourcing and the other reason was the huge market beckoning. The two ways of taking advantage of people namely, employability and opportunity. Again both are interdependent. The opportunity can be created only when money permeates down the economy and hence increases affordability among the masses.

Now keeping this short period of history in our mind let us analyse Globalised India in the first 6 years of the twenty first century. As more and more services (jobs) started coming in technology started to get more close to people and liquidity also grew. It grew all levels. Every house started buying a TV, Fridge and more ubiquitous was a mobile phone :).

Now in 2006 the same finance minister who faced a forex crunch now has a deluge of forex to manage the economy. The result, there is no dependence on the banks or indirectly the people to save. Saving is seen both by the individual and the government as a sin in a country which once had huge revenue expenditure sizeable portions of which was by paying interest for securities created out of Poepl's savings! Interestingly now liquidity with the people is high and they inevitably keep there money with banks. The reason being (http://syncwithjayaram.blogspot.com/2006/09/rising-salaries-vanishing-workers.html) . The banks now have all time high capital with no borrowers.

I want to temporarily end the article here for two reasons, I don’t like to write lengthy in one go and I want my reader to think. Before ending I want every reader who has reached this point to think what could be the reasoning behind me titling this blog Unsustainable …

Correct guesses will get no prizes, but means the reader is fit to write a blog of his own!