A Contrarian View:

US raised its debt ceiling to an extent of $2.4 trillion, thereby saving its face of not defaulting on its payments and hence affecting its sovereign rating from AAA to a notch below that. However, has it actually helped? After the bail out of banks and flushing of economies with more and more money, little has been achieved albeit more asset price speculation (Gold Prices hitting $1672 an ounce or INR 24,211 per 10 gms and Swiss Franc and Yen also touching new highs). The US job data has not shown any signs of improvements and the opposition in the US wants equal fiscal deficit cuts for the third tranche of the current raised debt ceiling i.e. $1.5 trillion to control the deficit and lesser burden on future generations to come.
Like my articles earlier, my question still remains, shying away from cutting costs and removing layers and layers of sloth and free lunches will eventually lead to default.
In the midst of all this, India has been tainted with a plethora of corruption scandals from Telecom 2G (I have lost count of how many scandals are involved), Common Wealth Games scandal, the Satyam scam and the current Iron Ore scam at Bellary. Now, the total of these scams do run in Hundreds of Billions of Dollars, however, it has done something which I think is a blessing in disguise, however, not without its economic ramifications (Inflation being the most gruesome one). It has slowed down the process of decision making or clearing of projects within the political departments. No one is willing to sign the dotted line of the fear that who knows what legal and political implication he/she might have to dodge.
My contrarian view is that this has done good as well as bad to the Indian economy. My views again will go back to the World War 1 era, when US economy went through unprecedented growth because of cheap money flowing emanating from the European region especially Britain and Germany. This was followed by the Great Depression, wherein more than 9000 banks in the US had failed and depositors has lost their money (it was not insured, FDIC came into picture much after this). This situation arose as cheap money floating around the world was looking for returns and since US was the only healthy economy post war, the money poured in, thereby increasing the capacities of industries (Auto Industry essentially) and speculation on asset prices predominantly real estate and stocks. The economy inflated and fell on its feet thereby wiping out large amount of investor money and confidence.

Compare this to the situation prevailing today, though the tools and measure available are much more sophisticated than it was in World War 1 era (it was still pegged at Gold back then), still any economy could be destroyed by the cheap money looking for returns (LIBOR today stands at 0.42%). The South East asian crisis was one example and so to a certain extent is China today. The interest rates are rising and the real estate and stock markets are in trouble. The capacities created are going underutilized and world is putting pressure on China to revalue its currency, which China has managed to keep under control artificially. The labor rates are rising and companies are mechanizing their factories to control costs (Chinese manufacturers have planned to use 1 million Robots against 300,000 as of today is near future). They are the largest holders of US debt (Above $1 trillion) and will go to any extent to support US so as to not let their debt lose its value.
India on the other hand did benefit from the cheap money available in the market, the stock markets which slumped post 2008, has recovered to above 18K (BSE) and 5.4K (NSE) mark. However, it has not breached the 200 Moving Day Averages, a sign that the Bull phase is still not in sight and a sign that investors are not confident enough. The inflation is at an all time high and the RBI has increased the interest rates for the 11th time since the past 1 year and the Repo rate (rates at which banks borrow from RBI) to 8% and Reverse Repo (the rate at which RBI borrows from Banks) at 7%. This is to contain inflation rate which still looms at 8%+ in the current scenario. Though many may question that it’s more of supply side inflation (i.e. when the product in produced but cannot be supplied due to lack of infrastructure), however, the capacity is not being created to absorb the flow of money. Yes, this is a vicious circle wherein the Policy decision making will lead to capacity creation and the policy inactivity is leading to lack of capacity creation, be it retail or infrastructure. The stock markets are leashed and range bound due to the fact that FII’s are not confident in the development of policy plaguing retail and infrastructure sector. The Energy sector, which is considered as the backbone of any economy is plagued by overcapacity as many a power plants are lying idle due to lack of coal linkages, which again is plagued by policy and environmental approvals and loss due to transmission. This again is putting pressure on books of not only Power companies, but Banks that have funded the projects due to uncertainty of recovery.

Had the government been a little efficient in approving the policies and laws governing investments, we would though have grown at probably more than 9% (probably much higher than that), however, the growth fuelled by easy access to cheap money would have led to spiraling of Real estate and Stocks more than creating capacity/value.
The capacities would have been created which would hold little significance in today’s world. As can be compared to China which is more exported oriented than India and was serving a mature consumer and economy. Its capacities today are lying idle due to slowing consumer demand in the US. In case of India, Money would or would not have trickled down to the lowest level.
The corrosive decision making of the government has led to low cost innovations to satisfy the investor appetite which is being shattered time and time again by political babu’s. Be it the current telecom price wars, the digital revolution in making, the Nano project, etc. Had the government been efficient, these low cost innovations would have come much later and only after the first phase of consolidation. The cheap credit availability would have fuelled the demand for products not needed by the hoi-polloi and hence would have inflated the balance sheets of banks. We would have gone through an era of consumerism plagued by debt and a burden on future generations to come.

The cheap or Hot money flowing around the world is nothing but a time bomb, which though available, will bring nothing but debt laden consumerism and burden on future generations without creating REAL capacities.