August 18, 2008

Globalization and the Credit Crunch

Everything is global...

The past four years have brought India economic growth of seemingly unstoppable momentum, often 9 percent a year, helped along by big inflows of foreign investment. Rising incomes and low interest rates enabled many middle-class Indians to realize the dream of owning a home, even while still in their 30s.

But economists warned that the economy was overheating, producing inflation and speculative bubbles in real estate and the stock market. So government policymakers moved to cool things down by raising interest rates and tightening the rules for home loans. Taken along with the general global slowdown and spiraling fuel costs, the measures have had the intended effect.

On Wednesday, the government projected the growth rate would fall this year to 7.7 percent, compared with nearly 9 percent last year. Industrial output slipped to its lowest in six years, growing 5.4 percent in June, compared with 8.9 percent in the same month last year.
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Trapped in debt, many middle-class Indians are struggling to cope. Raina's monthly mortgage payment has gone up by 12 percent. "I have to cut corners now, or I may not be able to pay back my loan before retirement," he said. Payments on some loans have doubled since 2004, when interest rates were at a record low.

"The boom of the last four years mesmerized them to live beyond their means," said Deepak Raheja, a therapist who runs a support group called the Hope Foundation. "In the past ten weeks, I am getting five to six new patients every week with financial worries about mortgages, loan repayments and credit card bills. All in the age group of 25 to 40. They exhibit anxiety, helplessness and depression. Some even contemplate suicide."

No longer are financial shocks localized. We saw the beginnings of that in the late 1990's and it's continued to develop which points out one negative of globalization, bad policy and laws lead to a collapse in one country that can effect consumers on the other side of the planet.

Posted by mcblogger at August 18, 2008 09:47 AM

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