Salman Khan, a portfolio manager in California has created hundreds of free educational videos, available on his web site, the Khan Academy and on YouTube. These videos cover the basics of banking, finance and the current credit crisis — I saw a couple and they’re quite good.

Even more importantly, there are hundreds of videos on mathematics (algebra, calculus, trignometry, probability and more) and physics. Salman has three degrees from MIT and one from Harvard, so he knows what he’s talking about.

Anyone, anywhere in the world can benefit — all you need is access to the Internet. A good idea, fantastically implemented.

Thank you, Salman for investing all this time and energy.

On September 19th, the U.S. Treasury Secretary Paulson issued a statement in which he said that the Federal government “must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy”. He called it the ‘Troubled Asset Relief Program’. Many have taken to abbreviating to TARP and from there, it is a short leap of imagination to call it a TRAP. The government had sent the legislation to the Congress for approval and it might be approved any time soon. We have something to say about it later.

But, even before the bill is passed and its ramifications known, stock markets around the globe heaved a sigh of relief and rallied hard towards the end of last week. It is a delightful irony that most markets showed a flat profile from Friday, September 12th to Friday, September 19th at the end of an unprecedented week. It is not so much the news of the proposed U.S. government bailout that stock market investors welcomed. The squeeze on short-sellers that regulators around the world applied worked its magic.

Short-selling banned but SEC created the conditions

Bulls are taken by their horns but I do not know how bears are tamed. Try banning short selling. Well that is what authorities in the U.S. and the UK did on Thursday. UK banned all short-selling of financial stocks up to January 2009. The Securities and Exchange Commission (SEC) in the US banned all naked short-selling in all stocks. Hedge funds have to swear under oath their short positions. Canada, Germany, Ireland, Holland, Taiwan and some others have joined. That is a shame. There was no reason for many authorities to impose restrictions on short-selling. It is not only unprecedented but also largely unnecessary. Even now, with history and experience behind us, human beings remain capable of making collective mistakes. That is scary.

Forgotten in this persecution of short-sellers is a matter of tiny detail that in 2004, the SEC made two important changes to its rules on the amount of leverage that broker-dealers could take on. One, it removed the discounts (haircut) it applied on the assets that these institutions own, in calculating their net capital. Two, it allowed five broker-dealers to increase their leverage from 12:1 to 40:1. Those five were Merrill, Lehman Bear Stearns, Goldman and Morgan Stanley. Three of them are not around any more.

(Source: The Big Picture)

It is not clear what role the institutions themselves played in this rule change. It appears that the retribution for the egregious errors of the regulators and the regulated entities would be paid by the shortsellers who seek to throw a spotlight on such behaviour. Strange are the turns that American capitalism has taken in the last few years.

Banning short-selling is to akin to blaming the mirror for the ugly image. But then, these days, one is a suspect capitalist if one does not cheerlead rising asset prices even if the means are not exactly fair. Steve Randy Waldmann asks if selling short into a financial panic was not done, then isn’t going long into an asset price bubble equally wrong. In their defense, of course, authorities are justified in doing so if they suspect financial terrorism akin to the unusual activity seen in airline and financial stocks before the 9/11 terrorist attack in New York. But, Carl Sagan, as quoted by Paul Kedrosky of ‘Infectious greed’ says that extraordinary claims require extraordinary evidence. The authorities have not produced any.

However, for this writer, conviction remains firm that any recovery in global equities and the U.S. dollar would eventually turn out to be a comic interlude in an, otherwise, tragic drama except that the comic interlude could last long enough to make us all feel like we were watching a new play all over again.

Incentives to take on excess risk remain

Some argue that there is nothing called a stable financial system. As long as human greed and fear exist, financial systems would periodically become unstable. According to them, it is just in the nature of things for financial systems to fall into crises. The only avoidable cause, in their view, is to avoid reckless monetary and credit expansion that many central banks either deliberately or unconsciously permitted in the last several years (See, for example, Michael Pettis). Such excessive monetary and credit expansions do not end without extracting their price in terms of financial institutions’ failures and economic stagnation or worse.

Of course, while monetary policy and regulatory prudence is at the heart of the stability or instability of the financial system, that does not mean that other known or identified problems should not be addressed. Some of them might end up vastly amplifying the consequences of monetary excesses. One such problem is the role of incentives and reward-punishment structures in the financial industry. Simply put, far too little punishment is directly borne by the wrongdoers for their errors. Most executives are rewarded for successes or with golden parachutes if they fail while losses are borne by the shareholders and the society at large. That applies to executives at the top and at other levels. Returns are rewarded while risk is socialized and worse, since it appears with a lag, it is not even recognized and traced back to the acts of omission and commission. Even in late-2007 well after the crisis had broken out, compensation packages were not tailored to incorporate risk considerations in evaluating executive performance.

In fact, incentives in the financial industry need to be addressed not just for reasons of financial system stability alone but also to ensure a fair deal to shareholders and clients of such institutions. Nick Leeson, who was responsible for the collapse of the Barings bank in Singapore, writes that he was offered five credit cards as soon as he had returned from Singapore, having been responsible for incurring GBP862 millions of losses in 1999 (See The Guardian).

U.S. Treasury announces a plan on Saturday

In an email exchange with friends in the industry in April, when I was asked whether the world would unravel via inflationary boom and bust or through a straight deflationary bust, I said that the outcome would eventually be deflationary and that, in the interim, inflationary solutions would be attempted. In other words, we would get there finally but through an inflationary route.

In that sense, the Paulson plan is not a surprise. It was always on the cards. Policymakers are not going to give up without a fight. Under the plan known informally as TARP, the Treasury is authorized to purchase USD700 billion worth of mortgage-backed securities from U.S headquartered institutions at an unspecified price and price mechanism. Decisions made by the Treasury under this special legislation have no judicial recourse. The Treasury would buy assets issued or originated on or before September 17th. By Monday (Sept. 22nd), this has been extended to non-America headquartered institutions and to many types of assets including commercial mortgages and non-mortgage assets. Macroman might succeed in selling his wooden cabinet to the U.S. government, after all!

For now, the proposal has no provision to help homeowners who are struggling to keep up with their mortgages. Also missing is any proposal to re-capitalize institutions that might find themselves undercapitalized once the Treasury buys its assets over at a price that could be less than the price at which the institution carried the assets on its books. Those wanting to understand these issues better could see here and here.

Further, the stunningly simple and yet sweeping nature of the authorization sought from the Congress has made many compare this to the “Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq” (see NYT). In fact, some find it plausible that the U.S. government allowed Lehman Brothers to fail to bring the system to the point of total collapse so that Congress could be steamrolled into authorizing the Treasury to do as it pleases, without judicial review.

Regardless of the merits of such a hypothesis, the mere possibility of it should make Congressmen move cautiously on the proposal and build in safeguards against abuse of power.

Different problems if the plan works

Even as a plan that focuses on the financial system, it is incomplete. The million-dollar question is if this plan would boost loan demand. The hope is that as mortgage rates come down, households would be able to refinance their mortgages and thus find the wherewithal to continue to spend. U.S. households have zero savings rate and those born around the World War II face immediate retirement. They need to save. To the extent any reduction in rates alleviates their conditions without a change in behaviour, global imbalances would remain. The U.S. would be saving too little and Asia too much. Second, return to spending habits by U.S. households would boost commodity prices and thus raise the specter of inflation all over again. Even if inflation were to return slowly in the U.S., it might return faster in Asia where the economies have barely cooled and where policy, on average, is still too loose. The world has, for the moment, run out of resources to support synchronized growth. Oil and gold have jumped already on Thursday and Friday.

If, unfortunately, inflation returned to the U.S., what happens to interest rates and would households really benefit then?

Then, there is the question of how the Treasury would find the money to do this. As a perceptive hedge fund insider pointed out, it was one thing for Asian nations to buy Treasuries and mortgage agency debt and accumulate reserves when they were deemed AAA credits. Can they do so even now and how would their public react? Of course, it is a stretch to think that most East Asian nations respect popular wish but it is not a stretch to state that they would fear the inflationary consequences of going back to reserves accumulation and thus entrench currency weakness.

Truth and reconciliation in America

Steve Randy Waldman’s two thoughtful pieces on his blog, ‘Interfluidity’ titled ‘To whom and for what’ (September 19, 2008) and ‘Inequality and credit crisis’ (August 31,2008) are worth reading. He also makes a compelling case for truth and reconciliation in America. Not just billions of dollars have been lost but also trust in America. He says that the process of rescuing financial institutions with government money should be transparent and institutions must come clean on the models and the prices that they had used in their books until the Treasury bought them over. This would enable the world to know whom to deal with in future and whom to avoid. He is right but the chances of this happening are fairly slim, however.

The mood in the financial market now is not to ask these uncomfortable and important questions. Whatever makes them live for another day is good enough now, for the industry and for investors. Once Congress approves this bill, investors, instead of feeling chastened, might feel that they have survived a bad crisis and that could embolden them to take on more risks unless regulators begin to take their jobs seriously. That is why I feel that stock markets, in the next few months, would do well. Reality would begin to bite again in 2009, as expectations are too high for economic growth and corporate profits. Enduring floor stock markets is a long-way off. Hopes over the miracles expected of the plan would turn to disillusionment. Market turmoil would return.

It is important to remember that what have been impaired are not just mortgage related assets but also trust in the U.S. financial system and capitalism, across the world. The consequences of that are not easily identifiable and would linger on long after this crisis is over. It is equally important to remember that the Treasury rescue plan contains nothing to repair the impaired trust and integrity.

A year ago, in an interview to Bloomberg, I had said that, by the time the crisis ended, the world of investors would be sick of stocks and real estate. Judging from the market reaction in the last two days, we are far from that point. I stand by that forecast. To that, I would add two more: by the time this is over, the U.S. dollar would no longer be the world’s reserve currency and America would have lost its AAA credit rating.

(These are Dr Anantha Nageswaran’s personal views)

In the last five to seven years, India has grown on the basis of its knowledge economy and consumerism. The IT industry, and its related industries, provided jobs for Indians. As Indians earned more, they spent more, and that’s how consumerism drove economic growth as a whole and also led to a huge growth in the retail-credit and consumer-credit business in India. As we peak today, this growth in consumerism is leading to a huge investment cycle in India. Because manufacturing capacities have been fully utilized, and infrastructure needs to be established, people are now investing in manufacturing capacities and infrastructure. I estimate the Indian corporate sector has plans today to invest about $700 billion in manufacturing and infrastructure, which will be spent over the next three years. The next wave of growth for India is going to come out of capital investment.[IK@W]

The Indian government has already accepted a little dent in its prospective growth rate this year. It is widely believed that India’s internally driven growth, has increasingly decoupled its fortunes from the US economy. It is certain that an US slump will impact India to a lesser extent now, than it might have done a few years ago. Indian companies are more resilient than ever to a global downturn these days, with lower borrowing costs and healthier debt-equity ratios. Nevertheless, there are some challenges.

Inflationary pressures loom on the horizon. Inflation triggered by higher food and oil prices could deflate the rapid economic growth curve in India. The tight monetary policy of the RBI is related to inflationary pressures. With large-scale credit contraction in the Western markets, the growth plans and capacity expansion at Indian companies will find it difficult to access overseas credit .

The uneven growth in the middle to short term, with the states of Madhya Pradesh, Orissa, Uttar Pradesh and Bihar having seen lesser growth than others, has led to increased social and political tensions. The increased spending on social sectors and populist largesses in the election year, including recommendations of a new pay commission, can also impinge on the growth story. This spending, however, can be met by the dramatic increase in direct tax collections (by over 40% in each of the last two years).

As a banker, Kochar can probably view certain propitious omens that most other economic commentators in this country cannot. The jury is, however, still out on her hypothesis and previsions of a sustained growth rate for the Indian economy.

The BBC reports that the World Bank is considering the first ever proposal for a loan of $3.5 billion to be disbursed and repaid in rupees and not the US dollar. This is being done to ostensibly counter the fluctuating rupee- dollar rate. However, it needs no saying that a continually strengthening rupee and forecasts of a double-digit Indian economic growth make the proposal extremely lucrative for the World Bank.

The Maharashtra state government is seeking a loan worth some $3.5bn but is concerned about the fluctuations in the value of the dollar.

If approved, it would be the first time the World Bank has agreed to a such a loan in rupees.

The idea is that the loan would be sanctioned in dollars, but would be handed over in rupees.

All repayments would be in rupees too.

This would prevent any changes in the amount to be repaid caused by fluctuating exchange rates. [BBC]

The Graduate is a recently minted MBA who is currently employed with a foreign bank’s business banking operations. He does not consider himself an expert on banking, he hopes to bring lay readers an inside perspective and further insight on finance in India.

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This Great Indian Mutiny post on Islamic banking in India has prompted me to write about some aspects of both Islamic banking and banking for Muslims in India.

A few caveats: I have only a little more than a year’s experience in banking, and I’m no expert, but I would hopefully have a greater degree of insight than the lay reader. Also, this post does not have any central theme, but is more a collection of responses to the points raised in the Mutiny.in blogpost, as well as some additional points on the subject I thought would be worth raising.

Let’s address the points raised in the blogpost first:

I’ve known many Muslims who invest in mutual funds, shares and traditional non-Shariah compliant banking products. Most Muslims in India who would go on to bank tend to think with a secular starting point.

The reality is a little more complex. I’m currently working in small business banking, and several of my customers are Muslim-owned partnerships who are borrowing crores. So Sandil’s point that there are Indian Muslims who have no compunctions about dealing with debt and interest is valid. However, I was working in personal banking for a while. Over there, me and my colleagues had to deal with a number of other Muslim customers who had a more orthodox approach. They would deal with the prohibition on interest and insurance in a variety of ways, including:

1. Not investing in mutual funds with a debt component
2. Donating the interest on their salary savings account to charity
3. Using a zero-interest current account instead of a savings account

Obviously, I would never have come into contact with Muslims who were so orthodox that they did not utilise banking services at all. The size of that market is anybody’s guess.

It would be best if existing retail banks offer Islamic products within their current schemes and carry out their ledger-separation, overlooked by a Shariah authority, who can certify that the profit is indeed separated. Besides, it offers a more legitimate front – the Sena would have to think twice before attacking at a larger and more ‘legitimate’ organization like ICICI, Stancy, HDFC or HSBC.

Existing retail banks, including my employer are in fact anxious to do exactly this. Malaysia and the UAE are the laboratory where domestic and foreign banks are concurrently running Shariah and non-Shariah compliant products. HSBC’s Islamic mortgage in Malaysia has apparently been quite a success, and Standard Chartered has recently launched a Shariah-compliant credit card in the UAE.

The Islamic REIT
However, with or without banks jumping in, Indian Muslims have already been making their own Shariah-compliant financial products.

When I was working in personal banking, I had to investigate a transaction that showed up on the money-laundering alerts. A current account which had been lying dormant for almost three years suddenly had a huge sum credited to it. I went to meet the customer.

When I got there, it turned out that the customer was a trust representing a number of local Muslims. They had pooled in money four years ago, used it to invest in real estate, develop it, and had now sold the property. The sales proceeds had been deposited into the account, and would be distributed again to the contributors. They had done this because they felt that this was more moral then investing in debt (interest prohibited), or in equity (too much akin to gambling).

This is quite fascinating. Long before REITs had been permitted by the Indian state, a group of Bombay Muslims had gone ahead and created a synthetic-REIT on their own. The diversification and risk management was much lower than a real-REIT, but there is a lesson here: marketing to Muslims who worry about the ethics of their financial product does not necessarily need an Islamic banking label.

Is Shariah Compliance the Biggest Hurdle?
Is Islamic banking the magic bullet which will pull India’s Muslims into the financial system and enable them to access credit and secure their savings?

No.

A much bigger problem faced by India’s Muslims is that the majority of them are too poor to be targeted by the banking system as serious customers. Financial exclusion of the poor is a much bigger worry for them than the absence of Islamic banking. And of course there’s the whole issue of ‘negative areas’, which I’ll address shortly.

When my employer was conducting market research on Islamic banking in Pakistan and the Gulf, it discovered that Shariah-compliance was ’sufficient but not necessary’. Customers would readily use traditional banking services, but if they were offered an alternative which was Shariah-compliant, they would feel happier with that and switch to it. If the same insights hold good in India, it’s clear that bringing Muslims into the financial system requires financial inclusion rather than Islamic banking.

The ‘Negative Area’ Trap
It’s an open secret that when it comes to retail lending, Muslims find it difficult to get credit cards or personal loans.

This difficulty arises not because of actual negative scoring for Muslims, but because the neighbourhoods which are classified as negative, no-lending areas, are usually ones which have high Muslim or Dalit populations.

Honestly, I’m not sure why this is. My employer is committed to diversity, opposed to discrimination, and also operates in several Muslim countries. At least at a global level, it doesn’t have anything against Muslims. So why does the credit policy fail Muslims in India? There are three possible reasons:

1. A complete mismatch between the global office and the country office. Everyone in the country top management is conspiring against Muslims. Unlikely, but possible. What makes it more unlikely is that this would be a conspiracy perpetrated by the top management of all banks in the country, who all have the same negative areas.
2. Plain laziness. The list of negative areas was drawn up a long time ago by the first bank to do retail lending, and then copied by all other banks, none of whom bothered to test it against actual experience. This is possible.
3. Negative areas are drawn up by banks in consultation with collections agencies. Collections agencies are not willing to work in ghettoised areas, because the people here who are creditworthy enough to borrow, are also probably politically well-connected. If they default, and a collection effort is made, it can be responded to with violence with impunity. I think this is the most likely reason.

So, at the end of this, where are we?
1. Islamic banking makes Muslim customers feel good. So banks could adopt it as a differentiating strategy. This makes more sense in countries like the UAE and Malaysia where there are many high net worth Muslim individuals than in India. But there might still be enough of a market in India.
2. India’s poor Muslims face a real problem in accessing organised financial services, and this is the same problem that the rest of India’s poor face. Greater financial inclusion, such as no-frills-banking accounts, and higher banking outreach will fix this. The fastest way to do this is enhancing competition.
3. India’s poor Muslims face an additional problem over other poor people in that they live in ghettos, and so have trouble accessing credit. The solution to this probably can’t come from the banking system, but from NBFIs, subprime borrowers, or community finance institutions. If these institutions could be plugged into a credit grading system, it would help.
4. Tweaking financial products to make them Shariah-compliant is not very hard. However, as the Percy Mistry report has pointed out, the way the RBI conducts regulation makes developing any new product hard. This is a separate challenge, and worth many blogposts.

Sidebar from Prashant: As we’ve said earlier, IEB’s always looking for new contributors.

Tyler Cowen wants to give merit-based gifts to Indians. Yes, this involves economics professors and free-market fundamentals. He has made an announcement on his blog, and it may be worth your time to check it out.

With your email, send a one sentence proposal of how the money will help India. I am keen to send much of the money to poor people, either directly or indirectly, but of course India is not just about poor people. Proposals of all kinds are eligible, including using the funds to help expand your steel factory, and yes using the money to open a new call center. But you must not give the money to beggars. [Marginal Revolution]

That’s not all, if you’d like to follow his example and do the same thing, he’ll help you disburse the money.

For starters, this move is simply bad financial practice, for it violates one of the basic principles of corporate finance – that the cash flows of the source of funds should approximately match the cash flows of the application of funds. it is quite an extreme case of violation here – with long term bonds being used to finance immediate expenses.

Leaving theory aside, while this measure, at the moment, may solve the cash flow problems, there is much doubt about the future. By issuing bonds, the firms are simply taking on more debt, which has to be repaid some day. What these bonds are doing is to just postpone the losses, and also, in a way, amortize them over several years.

Now, it is easy to see that issuing oil bonds is akin to taking on a personal loan. It is just like a loan to spend on a wedding, or to go on a holiday – or any other loan which is used to fund an expense, and not an investment. And if you have been to a bank and cared to look at their different products, you will notice that interest rates for personal loans are significantly higher than those for say home loans or car loans, which cover investments rather than expenses.

In context of this analogy, it would be interesting to compare the coupon offered by these oil bonds to the coupon offered by bonds which have been issued in order to fund investments. While business sense says that the coupon for oil bonds be much higher, I’m not sure if it is going to be the case in practice (I don’t have the figures. If you do, please leave a comment).

Now, in case we had functional corporate bond markets in India, they would have ensured that these oil bonds traded below par (assuming the coupon is similar to that for debt raised for investment) in order to account for the fact that they cover an expense and not an investment. However, the absence of such markets and government control over a large part of the financial sector enable the oil firms to get away with a low coupon.

Government owned financial institutions such as PSU banks (beautifully referred to as “SOBs” or “state owned banks” by Percy Mistry), LIC, UTI, etc. will be forced to subscribe to these issues. By subscribing at a price above the “fair market value”, these SOBs, LIC, etc. are forced to bear part of the burden arising from selling petroleum below cost.

To stretch things a little, a part of every rupee you save on account of lower fuel prices will be extracted from you by the SOBs (lower interest rates for deposits, higher rates for loans), LIC (a higher premium), etc. (the rest will go from the taxes you pay). What is effectively happening is that a part of the burden of petroleum subsidies is being redistributed, to users of public sector financial institutions and also to the taxpayers.

And as if all this was not enough, repeated usage of oil bonds would result in degradation of credit-worthiness of the oil firms, which would force them to increase the coupon rate for further debt issues, thus increasing their cost of capital, which could create much more trouble in the future.

To sum up, it seems like the issue of oil bonds will create a much bigger mess than the one it is supposed to solve. It might be useful for the government to look at alternate ways of handling this situation. Of course, it must be mentioned that the mess is not immediate – it will show up a few years down the line when the government would have probably changed. Who cares about such long-term mess-ups?

“By providing small farmers with improved financial services, such as credit, savings, remittances and insurance, this project will play a significant role in helping India’s rural poor benefit from growth opportunities,” the bank’s country director for India, Isabel Guerrero, said.

What growth opportunities? Ms. Guerrero must be deluding himself. That farmers are killing themselves should be enough to explain that lack of credit is not the problem – it is the inability to repay credit! Pouring more money into banks that cannot collect loans, from clients that cannot pay will not solve that problem. Improving water supplies, reducing US agricultural subsidies, and removing market distortions and government intervention in the agricultural supply chain might. Maybe Reliance can fix this mess.

Inaugurating the Second Agriculture Summit 2006 organised jointly by the Ministry of Agriculture and FICCI, the Prime Minister declared that the endeavour of his government would be to bridge each of the four deficit viz. the public investment and credit deficit, the infrastructure deficit, the market economy deficit and the knowledge deficit, which are responsible for the development deficit in the agrarian and rural economy.

Dr Manmohan Singh, threw open a debate in his speech by raising the questions like, what was actually needed by the farmers – a lower rate of interest or reliable access to credit at reasonable rates; whether our existing institutional framework was adequate for meeting the requirements of our farmers who were a diverse lot, whether we need it to create new institutional structures such as SHGs, micro finance institutions etc to proviproved and reliable access to credit and whether we needed to bring in money lenders under some form of regulation and he wanted Summit to find the answers.

The Prime Minister declared and called for fresh thinking on ways to incentivise greater public and private investment in irrigation [FICCI]

In addition to plugging his government’s rural employment guarantee and rural infrastructure fund, he also announced the setting up of the National Rainfed Area Authority that will promote “knowledge-based interventions” in rural areas.

The bad news is that the government is still in the process of asking the conference attendees to debate the topic. The good news is that Dr Singh at least appears to be ready for some fresh thinking. Well, here’s some fresh thinking, but will the heart allow his government to even attempt it?

“a lot of what is going on is owing to procyclical (i.e. destabilising) macro policy. I emphasise the distinction between the long-term trend and the business cycle. What we have seen for three years is the high of the business cycle, exacerbated by poor policies, and should not be mistaken for an acceleration of Indian trend GDP growth.”

Now Prashant knew that this would be of interest to me since I have been taking a rather different line vis-a-vis the long term trend in Indian growth (see, for example, this post).

My worries about what Ajay is saying are on two counts:

i) Firstly we have no precise and reasonable measure of just what trend growth in India actually is at this point, and there is a real problem if people start making estimates simply on whether or not they like the political flavour of the current government. It is clear to me at least that the trend is accelerating, but how far and how fast? In the background there is a lot of talk of the ‘demographic dividend’ but much of this has a ‘turn your nose up at the thought’ kind of feel about it. The demographic dividend is a real phenomenon, it will raise trend growth in India, and the only outstanding issue is whether or not we have in fact reached the full take-off point yet.

ii) Ajay says that India has “been helped by powerful world GDP growth.” I would say that this is rather putting the cart before the horse: powerful global growth has been helped by very strong autonomous growth in India, China, Brazil, Turkey etc. Indeed what we need is more detailed study of the growth process in the currently developing countries.

The German and Japanese economies are definitely driven by a combination of strong developing world growth and a healthy consumer appetite in the US, as, to some extent is China. Now that the US is slowing somewhat it will be important to watch what happens in China. At present there is no sign of a loss of momentum in the Chinese economy. If this continues, and if India continues to show high GDP growth, and if the emerging markets generally stabilise after the initial weakening of confidence and outflow of funds, then the US might avoid recession in 2007, since Germany and Japan would be given another push and markets would be more vibrant, and this already reasonably long boom would then go on at least a little longer. This is how I would put the state of play in the global economy. And here India may well play an important role, since up to now the Indian and the global economies have not been that tightly interlocked, and that may be about to change.

Well, these are my feelings. But I am not in India, and I am not an Indian economy specialist, so I thought I’d take some more opinions. I mailed regular IEB commenters Nandan, Aninda, and Venkat to see what their take on Ajay’s arguments was. The results are below in the comments section, and very interesting reading they make. Anyone else who wants to chip in with something, please go ahead.

Update

Possibly it is worth pointing out that Chetan Ahya and Mihir Sheth have a two part post about Fiscal Policy in India on the Morgan Stanley forum this week (and here), while Andy Mukherjee has himself taken up the trend growth topic here. I will try and say something about these in the comments section.