1996-1998 All over again?

Cicero once observed, 'everything has a history, therefore history is everything'. Alas, we are in a age when most of us tend to belittle history to such an extent that we are always condemned to repeat the same mistakes in different forms. It is probably for that reason that Hegel once noted that 'we learn from history that man can never learn anything from history'. Almost always we forget that the cost of forgetting history are immense.
 

The present state of the Indian economy is a typical example. The remarkable aspect of the present situation is that our collective memory does not seem to go beyond a few days, let alone 1996-1998.Of course, we did not have Google, though we had Netscape, we did not have digital papers - connecting to the net was still expensive. But not that these make any difference. After all, we have forgotten the consequences of the drought of 2002-04 as well. But, worrying about the rains is probably the last thing that we should worry about at this moment. Considering the fact that we are going to be effected by El-Nino, don't be surprised if there are floods in September.

There are a number of reasons why the present economic conditions reflect the problems that plagued the conditions that existed then. As in the present, Indian  corporate sector was working off the excess of the borrowing binge after the liberalization of the norms for raising money through ECBs/GDRs. Industries, that had built capacities far in excess of the requirement thinking that trees grow to the sky were shutting down due to lack of demand (sounds familiar - China). The United Front Government, ruled by regional satraps pulled in different directions, and the list goes on. 

The present seems eerily like the past: demand is slowing (but as Indian's we don't accept that there is a problem), bad loans were piling up: then it was Steel and other basic industries, now we have added to the list and now call them 'infrastructure'. Now, as in the past, we were in denial: we still insist 6% growth is possible, when it clear that the world and emerging markets are slowing and there are riots in Eurozone against austerity. At that time we were hopeful that exports would help India - it took the collapse of South East Asia, Russian Default, and collapse of Long-term Capital Management to realise that the world was different than what we had thought. After those events occurred there was an interesting change in the attitude of the banks: rather than lending, they started investing in Government bonds: it was called the phase of 'lazy banking'. Interest rates were high and it was safer to invest in Government securities than to lend it to crooks in the corporate sector. Ironically, this process is well under way in 2012.

Our politicians are a mirror image of our Equity markets: always hopeful and always wrong, especially when faced with reality. Again the present is illustrative: India a capital deficient country, and globally in the present context capital is a scare commodity, yet we are hopeful that our economy will withstand the present turbulence. Nobody elaborate how this is possible. What is odd is that despite the global bond markets factoring major slowdown in the economies, we refuse to learn from history. Our policy makers are still talking in terms of 6-7% economic growth when the world is talking about another bout of deflationary spiral, emanating from China. One has to wonder where India can hope to gain growth: We know for sure that the power sector is in trouble because our dependence on Hydel power and lack of capital. Exports are going to keep coming down in the next few years (not even months) due to problems everywhere. Oh yes, there is one way they can keep growing: slow return of all the illegal money stashed away in foreign banks. The likelihood of this happen is bright: banking sector in all the countries is in trouble plus interest rates are high in India. In deflationary time there is nothing better than steady income.

Indian corporate sector seems to completely unprepared for at least two important global consequences that plagued the Indian economy during 1996-98 and is likely to return in the next few quarters: dumping by Chinese and Russian companies. Chinese companies are likely to dump their goods for the simple reason that China in the throes of a deflation spiral and banking sector riddled with bad loans but a government with sufficient surplus would continue to subsidize their products. The result will be large scale dumping all over the world.

The other consequence that Indian corporate sector is completely unprepared is the consequence of the Union Government cutting its expenditure drastically. The last time this happened (1997-2000) there was a drastic slowdown. The rise in oil prices and the fall in the rupee only aggravate the problems. The expected rise in the diesel price may help avoid a ratings downgrade immediately but in the medium term it will not stop the inevitable (a ratings downgrade). India attracted foreign capital as due to its domestic consumption story. Since that is likely to end sooner rather than later, it remains to be seen how we can avoid the 'junk' status.