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Perils that can derail the economy...

Apr 17, 2008

Some of the largest economies in the developed as well as the developing world are seen having cold feet with regard to their country specific issues that are threatening their future progress. Ironically these 'issues' were once the cause of jubilance and optimism with regard to these economies.The largest economy in the world, the US - continues to churn out new stories of upheavals in the once flourishing mortgage market, as foreclosure filings jumped 57% YoY in March 2008. These are essentially filings by homeowners who wish to surrender their houses rather than pay up their mortgage liabilities. The bank repossessions more than doubled in March 2008 from a year earlier as variable interest rates on mortgages increased. As per Bloomberg, more than 234,000 properties are in some stage of foreclosure, which makes it one in every 538 US households.

The Indian economy, so far adjudicated as decoupled from the 'turmoils of the West', is succumbing to its own set of problems. While the problem of excesses is yet not conspicuous in the economy (apart from the inflation number), the sole hope of better infrastructure seems to be dwindling. The reason - poor execution! Despite having the second largest and one of the youngest population bases, the shortage of skilled manpower is one of the major hindrances. Couple this with red tapism and cost overruns leading to delays in completion.

Having said that, the investment proposals for capital formation continue to pour in. Infact, at Rs 5,583 bn in March 2008, they have increased 90% YoY (source: CMIE). Of this, electricity generation (37%), manufacturing (34%), refining (12%) and steel (11%) sectors comprised more than 90% of the recipients. Nevertheless, the statistics with regard to completion of projects under implementation are not very enthusing (see table). This is notwithstanding the fact that the volume and value of these projects are not even comparable to the colossal numbers of China's infrastructure investment.

Project investments completed during year
Fiscal Rs bn % of projects
under implementation
FY99 692 8.4%
FY00 970 11.1%
FY01 615 5.9%
FY02 717 6.2%
FY03 528 5.0%
FY04 542 5.0%
FY05 812 6.2%
FY06 781 5.0%
FY07 1,422 6.5%
FY08 1,003 3.6%
Source: CMIE Monthly review Apr '08

Closer to home in China, high growth itself is a problem. The People's Bank of China (Chinese Central bank) has ordered banks to set aside more money (the reserve ratio raised to 16%) to slow down lending after the economy grew by 10.6% YoY in the quarter ending March 2008. This was accompanied by the inflation numbers touching 8.3%, a 11-year high. China is trying to cool the economy after nine straight quarters of more than 10% growth. The government is thus taking measures to prevent rising prices from leading to social instability risk, thereby triggering a growth slowdown in the nation that contributes the most to global growth.

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