Well people this is a small attempt on my part to make the financial crisis going on rationally explainable to the common man. Trust me, none of us are immune to it.
To start with lets remember the fundamental of business is transaction and is explained by the barter system which is nothing but exchanging goods needed and of utility value between two parties or persons. Now money is also a type of 'goods'. The importance of money lies in the fact that its utility value can be generalized across transactions i.e. it can be exchanged for all type of goods and commodities. Hence its utility value is highest.
Now in the 'market' which is nothing but a contextual scenario where the transactions occur, the people (party 1) suddenly find that the type of goods produced by the firms (party 2) are not satisfactory and hence they do not give the money to the firms and take their goods in exchange. The people start hoarding the money for they do not trust the firms and their produce anymore. Therefore money (dollars here) slowly start vanishing from the market while number of commodities increase. The firms do all the gimmicks possible like giving heavy discounts and reducing the price but to no effect since the well informed consumers are pretty sure that the commodities are not worth exchanging for the money they have. Hence this lack of liquidity drives firms to closure. Now firms have also borrowed heavily from te investment banks which are nothing but financial sources for the firms. With the closure of firms, there is a loss of business and liquidity for these banks. Hence they too wind up business.
Well what I wrote till now is the macro scenario. But how does it affect me and India in general? Well since everybody wants to save up and hoard money, the interest rates will go up. Hence loans will be given but with higher interest rates, since no one wants to part with money. So those of us who wants to buy a house or a vehicle will do better to wait for sometime in future.
Because the currency of US is dollars and this is what is facing the crunch (putting little economical terms - the demand for dollar is high while supply is drastically low), its value appreciates with respect to other currencies; here we shall take our currency - rupee. Now if I buy something from US, I have to pay them in their currencies or dollars. Since more number of rupees equals one dollar now, I have to shell out more money. Hence imports will be hit badly since for the same quantity of imports, the nation has to shell out more money. On the other hand, exports will be non-profitable. Simple logic again - there is no demand of the commodities in US since people are interested in hoarding dollars than spending them freely for these commodities.
As I mentioned before, its better to stop buying houses and vehicles now, well the real estate business will be hit due to this decison of mine. And so is the automobile industry. TATA- Nano project may not be that badly hit for the customer segment its targetting can afford one lakh. But TATA may still face loss in aggregate in this project for it may not generate volumes thanks to the financial crisis. Software sector is one more sector that will be badly hit since most of the projects come from US. Since firms there are saving up by cutting costs and making calculated moves, no projects come to India and hence its psedo-employment for the professionals. Since there are no consumers, the operational activities of firms here will come down. This will result in lay-offs and loss of employement to many graduates being churned out of numerous colleges. I sometimes wonder why is education industry not tied up or affected by the financial crisis! Added to this, inflation is already at 12% in India. With no money flowing into pocket, how can one dream of buying the commodities despite the discounts and promotional offers? In a nutshell economy crashes, for we are too dependent on US. Industries which are independent like media, telecom and insurance will remain relatively unaffected. My Puja and Diwali expenditure has to reduce too sadly !
So when shall it end? Till all the loss making firms wind up and banks are left to finance only firms that will prosper. Then money flows in and people prioritise their demands and are ready to spend. Another way is if the US Federal Reserve (like our RBI) comes out and lends more money to the banks to enable them to lend out to these firms to save themselves.
Till then all of us have to wait and watch and hope that our leaders at Delhi do their level best to isolate our economy as far as possible from other countries. Complete isolation is not possible yet the sensitive sectors must be isolated. An internal market for software services ought to be developed and our industries should try to come up to offer a market for it. Hoping for the best !
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