Largest economies of the world US and China both headed for a major financial melt down and possible depression– where does India stand?
Sonal Oberois
Mar. 24, 2005

American and Chinese economies are headed for major crisis and possible depressions. The reasons are different though.

China has some major problems. The main problem is the corruption and inefficiencies of the State Owned Enterprises (SOE). Chinese economy is primarily divided into two major sectors. The coastal and southeast regions of China have export-import based on supply side economics pegged to US Dollar. But the State Owned Enterprises (SOE) run the rest of the country based on a planned economy. These SOEs are inefficient, money losing and incapable entities that really feed on Government resources and four primary banks that provide funds to these enterprises through Chinese common people’s deposits. The import/export economies are heavily debt burdened, based on American business model and have expanded very rapidly due to easy money availability through Chinese banks and free flowing Foreign Direct Investments (FDI). The SOEs and Import/Export companies are on the brink of a total financial collapse, which later will be known as “New Millennium's Great Financial Implosion of China”. Money in China has been made easy to fund the SOEs and the import/export companies with a hope that super growth will keep export/import companies grow and the tax revenue generated there can keep feeding the money losing inefficient SOEs. With US interest rate is rising and Federal Reserve is virtually losing control over money supply in America, Chinese import/export companies will face super debt burden as that sector of the economy is pegged to US Dollar. This will cause implosion and there will be no money or resource left to feed the SOEs and keep employment in China stable. This will be the financial explosion, which will finally cause the Great Depression of China.

America is not far behind. All the supply side economics has done is to increase the deficit, money in the hand of the rich who just do not how to spend or save or invest the same and breakdown of social security system which is now almost broke based on standard financial reserves criteria. The public and private debt burden is so heavy that the American economy will have to grow in excess of 2.28% every year to service and sustain the debt. America is in the middle of long-term secular deflationary environment with current cyclical stagflation. The Federal Reserve in the last five four years starting in January 2001 has increased money supply in any way they can. Mostly people have zero percent loans and loan-underwriting standards have been diluted completely. People just out of Bankruptcy have gotten hundreds of thousands of dollars of loan to buy homes, cars, and boats. Credit card debt has skyrocketed. Education loans have gone to the level that graduating college students may spend more than half of their working life to pay those loans off. The net result is a financial breakdown causing a depression worse than that in 1930s.

The triggering factors for both China and America will not be the currencies as most think tanks are predicting. Market does not allow things to happen that majority thinks about. In both the countries, the trigger for the meltdown will come from a lower than expected growth. A few quarters of zero or less than 0.5% growth of GDP in US and less than 4% growth in GDP in China will cause the snowball effect. In China, the import/export companies will not have the money to pay the debt service to Chinese Banks resulting in the SOEs not getting the funds they need to pay the employed mass. Millions of Chinese will be protesting resulting a major financial and social crisis.

In America, the consumers, the real estate and the Government debt will lead the financial meltdown. Lack of growth will make it impossible for the consumer and the Government to service the debt. At this time Government in America is actually not servicing the debt because since mid eighties, it is just wrecking the reserves of the Social Security Funds.

Well then in that scenario, where does India stand? The dice is in Finance Minister Chidambaram’s plate. India is now known in the West as the new inventor of supply side economics in the developing nations. India has followed Chinese and American models. On one hand the growth is based on export of services commonly known as Outsourcing of Information Technology (IT) and Business Process outsourcing (BPO). On the other hand, the Indian Government is in worse shape than the American Government as far as public debt is concerned. Trade deficit and Balance of payments are equally bad. But what is the killer is ballooning consumer credit based on very high interest rates. Indian consumers and Real Estate owners in the last five years have borrowed more “Future Values” than any other country in the world per million in population. That is scary. One good thing going for India unlike China is that India has a vibrant domestic Private Business Enterprise (PBE). In addition, Indian Government Owned Enterprises (GOE) are much more efficient that Chinese State Owned Enterprises (SOE) because GOEs are competing with PBEs for the last twenty years or more.

For India, the GOEs and Government Institutions will cause a meltdown similar to that in US and China. The PBEs will give it a fight – a genuine fight to hold the country’s financials up till the debacle is over. Who will win the tug of war? Well that really depends on PBEs collective financial and production strengths and hard working down to the earth Indian population in the next several years.

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