US financial bailout package to hit Indian economy

TOUGH TIMES AHEAD: Foreign investments will go down and this in turn will rattle Indian economy.

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New Delhi: The US Congress will meet on Tuesday to decide on the financial bailout package proposal aimed at cleaning up the financial mess on the Wall Street.

The final price for US tax payers is expected to be around $1.8 trillion.

The price tag so far is $900 billion dollars and $700 billion more is needed but that may not come easy with the US Congress yet to take a vote and American citizens asking why they should pay more for Wall Street's mess.

But US Treasury Secretary Hank Paulson is optimistic that this may be the silver bullet that could fix the US financial system.

"Well, what I would say is, I won't bet against the American people. We are an entrepreneurial people, a hard-working people and we will work through this, we always do. I wouldn't bet against the American people and I wouldn't bet against the long-term fundamentals of this country. But this is a humbling experience to see such fragility in capital markets and to ask how did we ever get here," Paulson says.

Meanwhile, it is bailout season in the US. American International Group, Inc. (AIG) got a life support of $85 billion while Fannie Mae and Freddie Mac got $200 billion. Another $300 billion went to the Federal Housing Administration.

But the real question is. Is $700 billion enough to clear up the mess? And what are the implications for the US economy?

More money also means the US deficit will balloon to about $438 billion and will make the dollar weak and inflation would rise. A deflated dollar means inflated oil and commodity prices. This will hit the economy of energy dependent countries like India.

Foreign investments in the form of FII and FDI will also weaken and this in turn will rattle the economy.

"I think liquidity is already getting tight in India and global liquidity squeeze as FIIs withdraw money from India is bound to have its impact," Uday Kotak, VC & MD, Kotak Mahindra Bank, says.

So it all comes back to the US bailout package. As Paulson and Federal Reserve Chairman Ben Bernanke begin their testimony in front of the US Congress , the world including India will be watching closely because as the last few weeks have shown when tremors on Wall Street has left cracks far and wide in the world economy.