Every dark cloud has a silver lining

A US depression is on anvil. Though not confirmed but in a hush hush way it is becoming the talk of the town. According to many experts the Depression in US Economy has already arrived. The mess of subprime mortgage has become somewhat unmanageable and is slowly taking the US towards an economic recession. The federal Bank of America is trying hard to keep this situation under control. The recent reduction in interest rates and announcement of relief package are some of the steps taken in this direction.

However, this US depression is affecting the world economy in a big way. US investors, in fear of a deep recession, want to liquefy their assets and, therefore, are making heavy selling of their stocks. This has affected the stock markets of entire Globe. The Indian stock market is no exception. During the last 10 days, it experienced it’s biggest one day loss and gain. The market is very uncertain and nobody knows exactly where it will head in the days to come. Owing to such fluctuations in the market, millions of small investors in India have lost their money and sleep.

No matter how bad the situation appears as of now, I want to tell something which is quite obvious yet very few people are talking about it: the positive effect of this US depression for India. Let us understand this in some more detail.

First positive effect of this Depression is that the Indian stock market is again returning to it’s core fundamentals. For the last few months the market was soaring at such a high pace that it defied any business logic or commonsense. People were not ready to listen the sane advice and everybody was ready to ride this bandwagon of a super bullish environment. The pace in the market was primarily due to heavy buying from big investors (FIIs to be precise). However, this buying was so huge that an imaginary atmosphere of ever increasing Sensex was developed.

It is common knowledge that Share prices should be determined on the basis of the performance of the companies in their respective fields. However, the stocks of these companies were telling an entirely different stories. The stocks which used to sell on a price range of 15 to 20 Price by Earning ratio (P/E) were being sold for a P/E ratio of 45-50 . This price was simply an inflated price with no solid logic behind it. However, people were in a rush to buy shares even on these price on the belief that the prices will soar more and they will be able to make some serious cash.

The recent fall in the stock market has helped in cooling off the heated share prices and has brought a common sense in the market. The prices have come down to their realistic value and this in fact is a very positive development for the Indian economy. The fall in prices has given a buying opportunity to those investors who wanted to buy stocks of companies but could not do so owing to their exorbitant prices. In the long run, this price correction will greatly help the Indian companies as only long term and serious investors will be able to get the real profit. The short term and non-serious investors will slowly move away and a stability will come in the market.

The second positive development of this US depression will come in the form of a fall in the global prices of Oil. A US depression clearly means a fall in the demand of oil. The lowering of demand will result in the fall of oil prices. This fall in oil prices will help India and China the most as these economies are having the fastest growth rate and a decrease in oil prices will keep deflation in control .The end result : more demand and more production.

There is one scenario, however, which may spoil the party. If the OPEC countries (the group of Oil exporters countries) decide to lower their oil production in view of fall in demand from America, there will again be a increase in the global oil prices. It is, however, believed that OPEC can be persuaded for not doing this.

The third and final benefit from a US depression for India is that soon we may see a fall in the interest rate here. As US federal bank is regularly lowering it’s interest rates to control the economy, the investment in US is becoming less and less attractive. As a result, the big investors are heading towards other profitable markets like India. This has resulted into a big dollar inflow into India making our currency rupee very strong which is pinching the exporters. Further, as interest rates are at their peak at the moment, this, along with a strong rupee has made many Indian companies postpone their investment plans for future. This situation, however, cannot last for long as doing so will hamper the growth rate. The only solution available is to decrease the interest rate which will make lending easy and spur the growth in many sectors. This will increase the inflow of money into the economy and give a boost to the demands. Further, a lower interest rate will also put a break on dollar inflow as the investment in India will become less profitable. Though, today, the Reserve Bank of India has not announced any decrease in interest rate and has asked the Banks to take a decision on their own, it is certain that sooner or later a reduction in interest rate is inevitable. Since India’s economy is not heavily dependent on US Economy and it has it’s own huge domestic market, a lower interest will give a boost to the production and help the economy.

So these were the three main benefits of a US depression for India. Though I know that depression is not good for any country and it comes with lots of pain and disappointment, in my opinion, this depression will not be a dreaded one for the US too. For the first time in the history of a depression in America, the world has a counterbalance in the economies of India and China which will keep driving the world’s economic engine even in tried and tested times.

The world is fast becoming a global village. We all have become interconnected with each others. What happens to one affects the other. There was never such a time in the history when we get to see so direct and interconnected effects of world’s events as we are witnessing today. Let us hope that we all get through the difficult times successfully Amen !

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