The year after

The first anniversary of the collapse of Lehman Brothers provides an apt moment to assess the impact that the present financial crisis has had on India.

At the outset, despite broad popular interest in “decoupling”— the notion that our business cycle is, or is becoming, independent from that of the advanced economies—the record shows that we are increasingly and inextricably linked with the global economic system. Second, while there is never a good time for a crisis, when this one came, much of the Indian economy was, in fact, well positioned to deal with the situation. Sections of the public were already seeing more money coming into their pockets as a result of various efforts that had been kicked off earlier in the year, such as the Pay Commission awards and an increased emphasis on NREGS. The RBI—in the face of some internal dissension and much external criticism—maintained its longheld cautionary posture on the money supply and on banking regulation.

For better or worse, commentators and policymakers have begun to infer all sorts of lessons from this experience. Much of conventional wisdom now holds that the Western regulatory model is fundamentally broken. This will likely lead policymakers to adopt a highly cautious stance towards further financial sector liberalisation, and to prefer localised, gradual and bounded solutions. There will also be greater emphasis on improving coordination among various regulators of the financial sector. Now we need to ensure that the global crisis does not become a cover for continued excessive fiscal laxity—which, left unchecked, will become a significant drag on future growth.

At a microeconomic level, it is clearer than ever before that India’s fundamental source of competitive advantage remains its low-cost production and service offerings. This is based primarily on labour-cost advantages, as India has not established adequate innovation capability, leading to high value-added product and service offerings, that are at scale and competitive with global leaders. For India to foster competitive clusters in the automotive, textiles and garments, alternative energy, FMCG, and other sectors, it will need to upgrade the capacity to innovate.

Undoubtedly, the most public face of the impact of the current financial crisis was seen in the labour market. Companies across sectors have used this period to rationalise their workforces and to reduce salaries and benefits. Cutbacks in white-collar jobs have featured prominently, but lakhs of jobs lost in the informal sector are largely missing from the public debate. Apparently, just as the credit rating agencies built erroneous models that assumed house prices would rise indefinitely, so had the Indian middle class built a “prosperity model” of opportunities and salary growth that failed to factor in the tremendous potential for volatility of returns to labour in true freemarket employment.

And what of missed opportunities? Almost everyone that our team met in researching Monitor Group’s new report, “Asia Through the Crisis”—a look at how major Asian economies have fared in the year since Lehman’s collapse—expressed the view that the real stimulus package would be a reduction in the transaction costs (regulations, poor and inadequate infrastructure) faced by business. As one of our interviewees noted, quoting Chekhov (whether cynically or aptly, you decide): “Any idiot can face a crisis, it is this dayto-day living that wears you out.”