Let's draw the right lessons ; It's a question that's taxing millions of people in this country: how will the meltdown on Wall Street impact India?

It's a question that's taxing millions of people in this country:how will the meltdown on Wall Street impact India? The short answerto that is: only peripherally those employed in the India offices ofthe major Wall Street firms will face some turbulence; the stockmarkets will gyrate some more; television and print journalists willspend many thousands of man-hours analysing the whys and thewherefores of the issue; and politicians and intellectuals of allhues will congratulate themselves for having kept India insulatedfrom the fallout of what is definitely the worst global financialcrisis since the Crash of 1929.

However, the crisis in the US, and some other parts of the West,does have important lessons for us; and it's important that we drawthe right ones. We have heard from the policymakers, includingFinance Minister P. Chidambaram, that Indian markets are safer thanthose in the US and most others. Is this by design? Or default? Thedistinction is important to ensure that we remain unscathed infuture, too.

One of the reasons for this relative safety is that we are notyet as globalised as many other countries are. Expectedly,politicians on the Left wing of the Indian polity and their fellowtravellers are tom-tomming this isolation as an achievement .Tragically, even centrist politicians are buying this argument.There's a very real danger that India will end up drawing the wronglessons from the crisis.

The fact is that the Indian financial sector is nowhere near asreformed as it should be. This results in suboptimal allocation ofresources and high operating costs. To celebrate this non-achievement on the reforms front is to worship at the altar of avery mediocre status quo, as the opportunity cost of not reformingis infinitely higher than the actual losses that may indirectlyresult from reforms. Tragically though, the bigger opportunity lossis less visible than that smaller actual loss that individual firmsmay suffer.

It must also be noted here that financial market reforms like thepension, insurance and banking sector reforms that India has beendragging its feet on invariably result in greater economicactivity, and the multiplier effect lifts the living standards ofindividuals not even remotely connected to the sector. Example: aboost to the insurance sector will make more funds available forinfrastructure projects, which will benefit everyone from the tycoonat the helm of the company implementing the project, to thosesections of society whose lives become easier as a result of suchinfrastructure, to daily labourers who get assured work for longerperiods of time.

Interestingly, parallels are being drawn with the East AsianCrisis of a decade ago. There, too, India's relative isolationstopped the contagion from washing up on our shores. But here, too,we drew the wrong lessons. In every case, then and now, thecountries affected had far higher standards of living than India's.So, the choice seems to be between remaining isolated and poor onthe one hand and being connected with the rest of the world,occasionally facing an ebbing tide that lowers all boats, and thenrising together again.

Distinction also needs to be made between institutions andindividuals... Right institutions or instruments in the hands ofwrong individuals can lead to disastrous consequences. The USsituation is partly explained by this. At the same time, the crisisalso proves that regulation as distinct from the micro-managementthat it often degenerates into in India has a lofty place in theworld's, and India's, financial market infrastructure. It isnobody's case that Indian markets should be reformed to benefit theinvestment bankers and other moneybags who so visibly gain from suchinitiatives. We must reform our financial infrastructure so that thehousewife in some small town, the labourer at a road-building siteand the vegetable seller at the street corner can also look forwardto a better tomorrow.