Socialism in Capitalist world

Not long ago, crawling with Hindu rate of growth, we were getting lessons on free, market driven economy. For my generation, western world was a fascinating example. Alas the lesson didn’t last long! Not for me at least.

So here we are...the greed of unregulated financial world has created havoc in world economy. I will leave the scrutiny of this mess to more accomplished commentators. But here are some simple facts...

- A self regulated, free market is a myth

- In this inter-connected world no one is insulated

- There are still many bubbles big and small.

It was just surprising how people managing macro-economic policies overlook few common facts. Facts like –

Easy credit cannot ensure perpetual growth; Prices of investments like real estate need not give you positive returns always;

And most importantly, in the inter-connected financial markets you cannot have unregulated institutions (read Sub-prime market, Investment banks, and some insurance agencies) closely coupled with primary banking and other better regulated institutions.

Chain remains as strong as its weakest link.

As far as India is concerned, we should take some valuable lesson out of this. We have just started building our financial system outside the government controlled sphere. Though in the long term, it is difficult to restrict our exposure to international financial market, it is important that we place a smartly regulated framework in place. It should limit the exposure in one particular sector and amount of risk a firm can take. Sound framework will ensure sound institutions.

In current scenario, we might face more selling pressure in equity market, probably some investment outflow also. But we have a healthy saving rate. We are still not a credit driven economy and in future also we need to avoid that path. The domestic consumption itself can keep Indian economy healthy.

We cannot exist in economic isolation but at the same time we can ill-afford an artificial bubble or lopsided growth of the economy. We have a long path to travel just to provide basic necessities to our people.

We should not travel on Iceland's path.