At the G20 summit in April 2009 where the world leaders were struggling
to stem the financial tsunami, French President Nicolas Sarkozy
threatened to wreck the summit in a rumpus over the “Anglo-Saxon model”.
The Anglo-Saxon model was till then a subject of debate in the guild of
economists. But post 2008-meltdown, it turned into a political issue
between France and Germany on one side, and the US and the UK on the
other.
France and Germany blamed the Anglo-Saxon – read the US – model for the
mess in the world economy. Sarkozy’s threat to walk out if the Summit
did not devise steps to reverse the Anglo-Saxon policies and practices
in financial markets led to the G20’s powerful campaign against the tax
havens. The G20 also disowned the old Washington consensus which was the
mother of the Anglo-Saxon financialism.
The Anglo-Saxon financial model evolved mainly in the US and was
followed by the other English speaking nations — Canada, the UK,
Ireland, Australia, and New Zealand. The model is “capital market based”
— that is finance mediated mainly by stock markets “at arms length”.
The other financial model, known as “Continental” Europe’s, is mainly
“bank-based” — that is, finance largely intermediated by banks. The
financial model intermediated by banks operates on ‘relational’ basis.
Germany, Japan, least hit
The debate brings out a crucial fact not debated in India — namely that
the financial model of the West is divided into bank-led model and
market-led model. See how it translates into numbers. In 2002, the
banks’ share of financial assets was 22 per cent in the US, against 72
per cent then in Germany. In 2011, the banks’ share in the US remained
the same, while in Germany it was still high, but declined to 62 per
cent — the effect of the Anglo-Saxon financial model on Germany.
Why do Germany and France accuse the US of dynamiting the world of
finance? Here is the simplest of evidences. What brought down the world
economy was the US sub-prime lending which created the housing bubble in
the US — entirely a creation of the market-led financial model.
See how the housing price index inversely moved in the market-led US and
the UK and the bank-led Germany. The 1989 housing index rose by 90 per
cent between 2000 and 2006 in the market-led US and in the UK by 133 per
cent. This house price inflation morphed and marketed as wealth
torpedoed the US and UK finances, later the world’s.
But in the bank-led Germany, in the same period, the housing index fell —
yes, fell — by 8 per cent. In Japan it fell, by more, 26 per cent. The
bank-led Germany and Japan obviously knew more than the market-led US
and UK that a housing bubble was incubating. Result. Germany and Japan
were least affected by the global financial meltdown.
The world now wonders how Germany escaped the 2008-tsunami. The Bank of
Japan proudly declared in 2009 that even as the world finance was in
turmoil Japan was safe. So much for the all-knowing arms-length market’s
knowledge about finance, as opposed to the relational bank system.
Asia, Europe similarities
But in this divide between the bank-led and market-led financial thought
and practices, where does the Indian financial model stand?
Indian policy makers Manmohan Singh, Montek Ahluwalia, P. Chidambaram
and Raghuram Rajan are all admirers of, or trained in, the Anglo-Saxon
economic theories and practices.
In his study along with Zingales (2001) Raghuram Rajan faulted
bank-based models and celebrated market-led models. It needs no seer to
say that the Indian establishment’s economic thinking is undoubtedly
Anglo-Saxon. But are the Indian economic players — the savers, the
entrepreneurs and the rest — Anglo Saxon in their outlook? Read on.
A study by Iowa State University in the US sees similarity between the
Asian and the European — read Continental — models. It says that the
Asian model is “closer in its institutional arrangements to the European
model” and “it focuses on high rates of capital formation”.
A Brookings Institution economist Barry Bobsworth (2006) described the
Asian savings model as ‘dynastic’ and trans-generational wealth
accumulation, while the savings in the US is the ‘personal’ wealth of
the saver. And more.
The Asian models trust banks more than stock markets. A paper (BIS Paper
No 46, May 2009) by the officials of the Bank of Japan explained why
Japanese households prefer bank deposits over risky financial assets,
when all financial instruments are well-developed and heavily traded in
Japan, unlike in other Asian markets.
In their ‘safe’ saving models Indians seem closer to Japan than to
Anglo-Saxons. The bank deposit to GDP ratio was 34 per cent 1990-91,
that is before liberalisation began.
In the two decades of liberalisation, bank deposit to GDP ratio almost
doubled to 67.2 per cent when the Anglo-Saxon economic thinkers of India
were counselling the Indian savers to go stock markets, not banks.
(Economic Survey 2011-12).
In the year 2011-12, against the bank deposit of Rs 5.9 lakh crore,
Indian savers divested stocks of Rs 2775 crore [net] – See National
Income Statistics CMIE (August 2013). The safe bank-led Indian savings
is far, far away from the Anglo-Saxon model.
Indian financing model
Are things likely to change in future? Doubtful, if the study on Indian
infrastructure financing (Global Economic Paper No 187) by Goldman Sachs
is any indication.
The study says that household savings is the main source of funding the
$1.7 trillion infrastructure investment need in India over the decade
ending 2020.
Adding that the “thrifty” Indian households “prefer bank deposits”, it
says that the annual financial savings of the household sector in India
would top $800 billion by 2016 which is 150 per cent of the total
current bank lending. How true is the Iowa State University study that
the focus in bank-led economies is high rate of capital formation!
And more. India is not just bank-led. Financial inclusion in India is
not limited to banks. According to the Global Financial Stability Report
2005, bank credit to private sector as a percentage of GDP was 38 per
cent in India, 140 per cent in China and 156 per cent in the UK.
How then do the Indian businesses get funded? It calls for a deeper
probe into small business financing India — without which India would
collapse. There is a rainbow model of funding businesses in India, much
of which is beyond the reach of organised banking. The National Economic
Census 2005 found some 41.8 million non-farming enterprises operating
in India providing livelihood and employment to 101 million persons.
They grew annually at 4.7 per cent during 1998-2005. Of this, 90 per
cent (37.6 million) is financed by families and local sources. They are
not financially excluded. They are very much financially included,
though not through the banking system. Therefore, financial inclusion in
India does not mean banking.
Look at a few of the innumerable examples of informal and huge financial inclusion cited in the book Indian Models of Economy Business and Management (Prof Kanagasabapathi, PHI Learning Private Limited 2012).
A study of 35 diamond exporters in Surat and Ahmedabad showed that 31 of
them received 20-30 per cent of their initial capital from families and
relatives. A study of the branded ghee business in Tamil Nadu revealed
that almost all of them were funded by their families to start their
businesses.
In Sankagiri, a small town in Tamil Nadu which has emerged as the second
largest lorry transport cluster in the country, some 80 per cent of the
truck owners of today were drivers and cleaners a few years back.
Almost 90 per cent of them were from agriculture background and 20 per
cent of them actually were engaged in cattle grazing. Only three per
cent of the Sankagiri truck operators sourced their funds from banks.
According to a study of Karur in Tamil Nadu, home to two large scheduled
banks and 54 branches of nationalised banks, out of the estimated Rs
2400 crore required by the exporters in 2001 only one-third was provided
by banks.
In respect of the knitwear export cluster Tirupur, the World Bank noted
that “large and diverse non-bank sources of credit including private
finance companies, rotating credit unions called chit funds, money
lenders, and forms of mutual assistance between friends family or kin”
funded the business.
Yet, the entire range of small business financing in India, including
the most efficient ones like the Shriram group which has just one per
cent NPA, is trivialised and dismissed as non-banking finance — to be
curbed rather than promoted.
Actually, we need more of them, not less. We need a regulator who
understands them. We need an intense national discourse on the need for
rainbow-like financial model for India.
Will the Anglo-Saxon economic thinkers come to terms with the Indian reality? Will they also look at Germany and Japan?
(The author is a commentator on political and economic affairs, and a corporate advisor)
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