A rejoinder to my last article on "Financial Meltdown"

A few of my readers felt that i was too pessimistic in my last article on "Financial Meltdown" and also added that i should have offered some suggestions on how to tackle the crisis. I felt humbled by their comments and so i share a few thoughts on initiating a response to resolve the crisis. Between my last article and now a great event has happened, Barack Obama- a sign of great hope and change is the President elect of USA. Though we understand he does not have a magic wand to deal with the crisis but the whole world looks up to him.

Here are my thoughts:
Global Response
A syncronized global response from central banks of major economies is essential to cut interest rates and increase liquidity into the system. Besides, we need a unified mechanism to oversee the global financial markets. In addition, a uniform accounting policy is required which is to be audited periodically by a global auditing corporation comprising of representives across countries.

Cut Taxes and increase Government Spending
Yes, i'm in strong favour of reducing income and/or other taxes. This can be a temporary step but i fell an essential one. We need to leave more money in the hand of common man at this time.
Coupled with tax cuts government needs to increase spending on infrastructure to boost employment. Besides, infrastructure it may also be a good idea to recruit in sectors where goverment feels the need to hire for anticipated growth e.g. Banking, Education.

More reforms
The Indian GDP growth estimates have already been lowered to around 7%. If we are not aggressive on reforms then we may well fall short of this target. In order to grow at 9% or more we really need to take a hard look at sectors which can be opened up further. Sectors like Oil & Gas, Healthcare, Education, Retail, Biotechnology do provide an opportunity.

Increase in trade between emerging economies
Currently, G-20 countries account for around 80% of the world trade. However, we need to look beyond G-20. If there is a need to introduce new trade pacts which ease up trade between smaller countries then so be it. Make the reginal economies stronger. We know the biggest consumer in the world, USA cannot be ignored but the need of the hour is to increase trade between smaller reginoal blocks e.g Asia & Latin America. Gulf represents a wonderful opportunity too. For once, Gulf countries should be willing to look beyond oil.

Arrest the decline of rupee
RBI has already intervened and solld dollars to check the declining rupee but more needs to be done. This has resulted in our forex reserves reducing from a high of $314.62 billion (Rs15.6 trillion) in May to around $250 billion. However, an appreciating and stable rupee is much needed to send the right signals to the FII community who may be looking at the right opportunity to re-enter particularly when the markets seem to be finding a bottom. Once the FIIs start buying stocks this will help rupee to appreciate and perhaps we may not need to sell dollars from our forex kitty.

Cut the CxOs compensation
The CEOs salary do come under a scanner when something like this happens but unfortunately the top guns fail miserably here. The Board of most companies seems to be very weak in administering CEO compensation although much has been said about it. The ground reality is that not much action is visible. I was just reading that Larry Ellison (Oracle) took approx 195 million as compensation last year. Back home Anil Ambani takes around 48 crores. Now what i don't understand is that the same CEOs (especially true of US CEOs) are the first to think of layoffs as the first recourse to cost cutting. And the people who are laid off will be mostly junior to mid level workers. Ironical isn't it ?

At the end, all i hope for is that a year from now or before, i would like to write on the revival of current economic crisis - "Great Depression 2.0" and how India emerged stronger from this crisis.
Till then Dasvidaniya !!

Sameer Tikoo