Decoupling

by Manshu on January 12, 2009

in Opinion

Decoupling – has different meanings in different contexts.  The term has its origins in Physics, and is used to describe the lack of interaction between two particles.

In the context of Economics; especially emerging economies – Decoupling was the phenomenon, where – the emerging economies were insulated from the slowdown in growth of US and other Western Countries.

When the going was good, everyone talked about how emerging economies, and especially India was decoupled from the US.

A lot of people in India were convinced of this because most of the Indian growth comes out of domestic demand.

India is very different from China, when it comes to its engine of growth. Exports form roughly 40% of China’s GDP, whereas they form only 22% of India’s GDP.

That is the main reason why you hear of a lot of factories closing down in China, but, not so much bad news was coming out of India until recently.

But now – with one of the biggest corporate frauds getting discovered – in India, and the existence of one of its biggest IT companies getting threatened – the news may well start to worsen.

The NYTimes has this great story which clearly outlines what exposed the fraud, and how all the economies are tightly integrated with each other today.

Essentially, as the recession deepened in the US – American hedge funds and other institutional investors sold their assets in India (and the rest of the world) – and so the stock markets came reeling down across the globe.

The Indian stock market is down – more than 60% from its highs. When the stock market came down – the source of funds that was fueling the gap between Satyam’s (the company in the center of the storm) actual and reported numbers was plugged. This source of funds was the promoter’s own money. He had pledged his own stock in the company with banks – against which he was borrowing money, and pumping it in the company.

When the market plunged – the banks that held these shares sold them off, and the promoter was no longer able to pump in the money required to hide the gap.

Thus the global credit crisis brought forth India’s biggest corporate fraud till date.

Decoupled – no more.

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