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K. Ramesh

AT A time when the IMF has warned that a lengthy war could derail the fragile recovery of world economy, the US President, Mr George Bush's announcement that war will go on `as long it takes' has further intimidated the sentiments of business in the UK.

The re-building of Iraq, to remedy a decade long sanction and a war, is estimated at $100 billion. Mr Bush has requested Congress for a good $75 billion, and his partner Mr Tony Blair needs £1.25 billion.

The London Stock Exchange is categorical that a long war will undermine recovery and put business in extraordinary uncertainty. Specifically, two direct effects could be higher oil prices and lower consumer spending. The first would hit manufacturing, consequently eroding profits and slowing investments. Consumer spending primarily drives American and British economies, and any sharp reduction in such spending, would have an equally strong negative effect on the countries. While this is the fear of the British business community, the common man is worried over the debacle of large pension funds and the almost certain downslide of the real estate sector.

The Britain Pension Policy drew flak all-round, from employers, unions, consultants and fund managers. The pension funds black-hole is thought to be £300-billion deep.

A good majority of the funds had invested in the stock market, in anticipation of high returns. Pension funds are supposed to have a balance of portfolio, with a good chunk invested in government bonds, with assured returns, with greater safety.

This mis-calculation has led to huge booking of loss, due to falling share prices, raising doubts about the value of the investments they continue to hold. Second, news reports suggest that the removal of tax credit for dividends received by these funds has compounded the difficulty.

Last year, employers made the biggest increase in contributions to pension funds since the 1970s — a direct result of the falling share prices and an ageing population. In a highly uncertain business environment owing to war in Iraq, and the almost definite increase in state expenditure, the business community is wary of continuing to spend so much for essential social security.

Amid much bad news, the only note of cheer was the real estate sector that has been growing steadily, to the wonder of analysts and the media. But a specialist said in a Radio BBC interview that it was nothing but speculation that the sector will go up; there is no change in fundamentals. The property market is expected to go down by at least 10 per cent now. The coming months would witness a reversal of the unreal growth seen by property market.

One common factor for the crisis in both pension funds and the real-estate sector is speculation. Particularly, the correction for pension funds is going to be painful for the beneficiaries. It may be worthwhile to follow up on how the reform is made in the pension funds, as there may be valuable tips for Indian reformers.

(The author is a Chennai-based Advocate and a fellow of ICAI.)

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