The global recession and India

Published on Hindu Business Line, by C.P. Chandrasekhar and Jayati Ghosh, August 23, 2011.

With global growth slowing and financial markets experiencing a downturn, the fallout for India is a matter of concern. The channels through which these effects could be transmitted are more in number than conventionally recognised … //

… Exposure to global finance: 

Besides export volumes and revenues, the other reason why India is likely to be adversely affected by global uncertainty is exposure to global finance. Direct exposure to international financial assets, including the now less valuable debt issued by OECD governments, is only a small part of the problem.

As the distribution of India’s gross international asset position (Chart 2) indicates, the two important forms those assets take is direct investment and accumulated reserve assets. Portfolio and other forms of investment are small or negligible. Since private players largely hold direct investment assets, the squeeze in global demand would affect the overseas revenues of these firms, but possibly not do too much damage to the Indian economy.

What is more of an issue is the fate of the $274 billion of foreign currency assets (out of a total of $305 billion of reserve assets) held by India. While $127 billion of these are held as deposits with central banks, the Bank of International Settlements (BIS) and the IMF, as much as $142.1 billion is invested in securities, consisting largely of government securities (Chart 3).

With the uncertainty surrounding the value and soundness of public debt, the danger of the erosion of the value of those assets is now significant. For example, India holds $41 billion of US Treasury securities that have been downgraded recently by S&P. The balance is likely to be in the even more suspect public debt of European governments.

In addition to this, banks in India reporting to the BIS have disclosed holdings amounting to $31.3 billion in financial assets abroad. Of these, $14.9 billion are the external positions of banks in foreign currencies vis-à-vis the non-bank sector abroad. These exposures too are vulnerable given the volatility in financial markets in the OECD countries.While the sums involved may be small (relative to the $1.2 trillion held by China in US Treasury bonds, for example) they are of significance because of the nature of India’s reserves.

Unlike in the case of China, the reserves that insure India against adverse global responses are not earned through current account surpluses, but are drawn from what foreign investors have delivered in the past.

They represent liabilities that are being held as assets that on average yielded returns as low as 2.09 per cent over the year ended June 201 (down from 4.16 during 2008-09). If the value of those assets is eroded, other things constant, India’s ability to cover its liabilities is eroded as well.

Besides this, there is the fact that because of the presence of legacy capital in the country (consisting, as of March 2011, of $204 billion of direct investment, $174 billion of portfolio investment and $265 billion of debt and other investments) India is vulnerable to global investor sentiment. International finance may assess its so-called fundamentals very differently from the way they are assessed by the government.

Public debt: … (full long text).


Reserve currency, on wikipedia;

Reserve Currencies in Distress; Aug. 18, 2011;

Obama, financial war and the elimination of DSK, on, by Thierry Meyssan, 28 May 2011:

  • It is impossible to understand the downfall of Dominique Strauss-Khan without linking it to his project for the creation of a new international reserve currency, which was to be launched on 26 May 2011 at the Deauville G-8 summit. The project was paradoxically anticipated as much by the Emerging States as by stateless financial capital, but rejected by the U.S.-Israeli military-industrial complex. Thierry Meyssan exposes the chicanery of the Obama administration to dodge its commitments …

Obama, la guerre financière et l’élimination de DSK, dans,  par Thierry Meyssan, le 26 Mai 2011:

  • On ne peut comprendre la chute de Dominique Strauss-Kahn sans la replacer dans le contexte du projet qu’il incarnait de création d’une nouvelle monnaie de réserve internationale prévue pour aujourd’hui 26 mai 2011. Un projet paradoxalement attendu par les États émergents tout autant que par la finance apatride, mais refusé par le complexe militaro industriel israélo-états-unien. Thierry Meyssan lève le voile sur le coup-fourré de l’administration Obama pour ne pas tenir ses engagements …

Obama, der Finanzkrieg und die Beseitigung von D. Strauss-Kahn, auf, von Thierry Meyssan, 31. Mai 2011:

  • Man kann den Sturz von Dominique Strauss-Kahn nicht verstehen ohne ihn im Zusammenhang mit dem Projekt zu erörtern, eine neue internationale Reservewährung zu schaffen, die für heute den 26. Mai 2011 vorgesehen war. Ein Projekt, das paradoxerweise von den aufkommenden Staaten sowie von der heimatlosen Finanz erwartet, aber vom israelisch-nordamerikanischen, militär-industriellen Komplex abgelehnt war. Thierry Meyssan lüftet den Schleier der Tücke der Obamaregierung um ihre Verpflichtungen nicht einzuhalten …

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