US Sub Prime Mortages

Much is written about the fall out of US Sub Prime mortgages and the impact it is likely to cause on US economy and the world at large. But an important lesson in it for India is that Sub Prime Mortgages served to prop up the US economy for the last 5 years at the expense of the Developing economy who had at the guidance of the developed economies, (had) developed a growth model which was predominantly driven by US consumption!

None of the planners outside US could foresee that such a model is not sustainable even in the medium term leave alone for ever. So the savings of poor countries like India, were being parked as foreign exchange reserves in US Treasury bonds which fueled the liquidity which boosted wasteful consumption. One must acknowledge the ingenuity of the US financial brains who planned this out and implemented it to the tee.

The hard lessons which we in India learn from this futile exercise, is that it is necessary to fund across sections to ensure growth and through growth consumption.

In the US with the treasury backing, funds have been extended on over valued assets to individuals who do not earn enough to even support their living expenses leave alone meet mortgage repayments and own assets. As reported in the press the abuse of credit facility, has been so rampant that even basic norms such as insisting on minimum down payments for availing mortgages have been waived off. All these to maintain excessive consumption!
Take a leave out of Sub Prime mortgages and cox banks to fork out up to a nominal 5 % of their advances to fund persons in poorer section of society, whose repayment capabilities are limited, but willing to commit to repay. Such an effort will spur consumption and through consumption inclusive growth. Such advances shall be refinanced by the RBI through long term instruments directly and eventually provided for in the budget.

Planners in India are staring at growing disparities caused by excessive urbanization and phenomenal growth of white collared jobs and compensation. While our financial systems are robust and fund these sections of society, it is time that we addressed the poorer sections across the board.

India is unique in many ways and needs novel solutions to maintain its growth path and achieve inclusive growth. It is necessary to be bold and the time is ripe to take such populous steps given the fact that this is an Election year.