Part 6: What India/world could do to avoid deep recession

1. It is being suggested that current crisis is because of combination of overlending to sub prime group, development of financial products without attention to their consequences. And that the problem can now simply be solved by recapitalizing FIs who have lost significant capital.

In my view the unfolding crises is not only due to the above cause or else why would many corporates around the world would be reporting lower profits for last few quarters whereas the full scale of financial crises has come out in open with its consequences only this year and its impact will unfold from here on. Secondly infusion of capital will not fully solve the problem as is being suggested- for the simple reason that FIs are likely to become more circumspect- overlending will be repalced by underlending with even credit worthy borrowers becoming casualties for some time. Hence the case for public works in one form or other.

The unfolding crises is result of two trains quietly hurtling downhill untill they both collided with a bang. First was subprime crises. Second was the overcapacity brought about by era of low interest rates and possible default here too with rising interest rates. Second explains the falling profts in many cases and overcapacity. It seems that FIs evaluate & lend for large -long gestation/long maturity projects factoring in only present interest rates.

2. It may be added and clarified that rural spending would have higher income multiplier effect because lower or exempt tax structure in rural areas/agriculture income and that would put a higher disposable income for spending in the hands of the rural income group. Ofcourse the risk is that unless primary articles are in good supply, inflation could be a worry again