‘India has more subprime skeletons’

Noted economist surprised that Indian banks participated in the mess

HONG KONG: Financial institutions in India probably have sub-prime problems that are “waiting to be exposed,” says Jim Walker, noted economist and CEO of Asianomics.

“I’m pretty sure there are a few more skeletons to come out of the cupboard,” Walker told DNA Money in Hong Kong on Wednesday.

He was responding to a question on whether ICICI Bank’s exposure to the sub-prime mortgage crisis was a symptom of a larger problem in India’s financial sector.

“I’m slightly surprised that Indian banks have participated in this,” Walker said. “Indian banks have been so heavily geared towards lending at home that I didn’t know they had any assets left - or any liabilities left to use American paper as assets!”

The problem wasn’t of course limited to Indian banks. It’s true of banks all over Asia, he said.

“It’s more likely in jurisdictions where loans-to-deposits ratios have been falling for the last seven or eight years. They have used money to enhance yield by buying some of this high-yielding American paper.”

“There will be a lot more revelations,” Walker said.

More generally, Walker prophesied that India would certainly be affected by a US recession, “but not severely.”

India’s economic growth story, driven by domestic demand, “is very real, and that’s going to keep the momentum going. I reckon that earnings will stay pretty strong in India. I would be overweight India.”

That, however, doesn’t mean that Indian markets won’t fall. “But perhaps they won’t fall as much as other markets.”

According to him, the best-case scenario for India for 2008 is that the US recession takes the heat off the Indian market and the Indian economy, and there is an 8% or 7-1/2% GDP growth. That, he said, would qualify as a “slowdown, but not a significant slowdown.”

But even the worst-case scenario —- 6% GDP growth —- is “pretty good”, he noted.
Walker was lavish in his praise of the Reserve Bank of India for its management of monetary policy, and said it had “sent good signals to the investment community.”

The RBI said Walker has made a very clear policy to target credit growth and money supply growth.

“Which is is exactly what central banks should be doing. They look at inflation and they know that it’s monetary conditions that matter. And what the RBI has done over the last few years is to spend all its time trying to contain money and credit growth,” he said.
Interest rates in India, Walker noted, are around 13-14%, “in line with nominal GDP growth.

Those are good signals being sent to the investment community… You really have to hand it to Dr (Y V) Reddy and the RBI team. They’ve done an amazing job!”

Asked if, in his estimation, the RBI was perhaps the best central bank in Asia, Walker responded: “By far, the best central bank in Asia —- and probably one of the best central banks in the world.”

But his opinion of the Central government’s economic policy wasn’t as high. “I can’t say the same of the government,” he said, laughing. “But that’s another story…”