Too much banking and credit has damaged Europe and forced it into a crisis that is now assuming the proportion of ‘weapon of mass destruction’ for the world, an ASSOCHAM paper has said.
At a time when the Indian government is placing a lot of emphasis on financial inclusion, a big takeaway from the European debt crisis is that too much banking and more & more credit can lead to lower growth, the paper pointed out.
The study titled ‘European Sovereign Debt Crisis- Weapon of Mass Destruction – Impact on India’, suggested that “too much of leverage (borrowing), too much of liquidity (cash), too much of complexity and too much of greed – they all have led to the crisis.”
Quoting several international studies, the ASSOCHAM paper said, “It is now being argued that too much of finance is also not conducive to growth. While at lower levels, a larger financial system leads to higher productivity, beyond a point, more banking and more credit result in lower growth. Further, it is also argued that fast growing financial sector can be detrimental to the aggregate productivity growth. Moderation in approach, therefore, is an important lesson.”
The ASSOCHAM study, which gives some key ‘takeaways’ from European crisis for India said, that in the period prior to crisis, the financial activity grew so much that the umbilical cord between financial and real sectors was severed and the finance started to exist for its own sake. The dangers of such a scenario have been quite emphatically conveyed by the crisis.”
The paper gives another interesting angle and comparison between the western economies and India. Too much of social security in the western nations made people there shun savings and encouraged them to live beyond their means. That is not so in India and its genesis can be found in the fact that there is not too much social security in developing nations like India.
“India historically, has been a country of savers-perhaps as there does not exist a social security system or a plan for larger section of society, that services their old age needs,” said ASSOCHAM secretary general, Mr D.S. Rawat.
The developed countries with good intentions extended larger social benefits for their people but somewhere lost track to find themselves in a trap of high debts and falling growth curve.
“They (developed countries) consequently ran into falling investments and slowing government revenues and the good days could not continue seamlessly,” said Mr Rawat.
While India has a strength of high savings , its own problems of high fiscal deficit, elevated inflation, currency under pressure, cost of lending, falling pace of growth have all contributed to economic upset though the policy intervention and reform process still need to be rejuvenated.
In India, “high borrowings by the government and cost of funds, could be a matter of concern. All efforts of the policy makers are targeted towards soothing the markets and eschew volatility and falling confidence graph.” the ASSOCHAM paper said.
The paper also came down heavily on the complicated economic models suggesting they are not absolute. It said the European economies in crisis now depended almost blindly on these models.
“Post crisis, participants have woken up to the harsh reality that models do not fully reflect the realities of life and excessive reliance on quantitative models is fraught with risk….” the paper said.
It quoted Lebanese American author Nassim Taleb as saying “You are worse of relying on misleading information than on not having any information at all. If you give a pilot al altimeter that is sometimes defective, he will crash the plane. Give him nothing and he will look out the window.”
The paper released last month, said with the Euro area appearing to head for a recession and the global growth slowing again after a short recovery, growth in India too has moderated more than was expected earlier. Slippage in fiscal deficit, further fuelled by food and commodity inflation have led to policy tightening.