Thursday, October 13, 2011
The Memories of two major events in past still linger heavily in my mind. It was few years back the SARS played a havoc with virtually every sector of the economy affecting some of the major economies especially in the East and Far East. A couple of years back another disease – Swine Flu that originated from South America played havoc in US, Europe and lately moved to Asia including the Indian sub-continent. The impact of some of the wars in Gulf and other countries also had influenced exports from many countries including India. The recent news therefore of the recession hitting USA and Europe and then the talk of global economic meltdown can not be interpreted in isolation without the acceptance of the fact that we live in the era of globalization.
And yet, Palaniappan Chidambaram, the erstwhile Finance Minister observed "Indian economy is insulated from the crisis … The global financial crisis will not affect us much". His boss and an eminent economist Dr. Manmohan Singh joined the chorus till he had to reluctantly admit that no developing economy could possibly remain immune to the global crisis. The economists of all hue went on yet maintaining that this may be a storm in the tea-cup and just a mild recession could at the worst visit us. However, the gloom on the trading floors of the stock markets soon was found to be spreading to the shop floors in the factories with the inflation defying all measures of control. Does this mean Indian Economy is as vulnerable as anywhere else to the global meltdown?
While I pen this piece there are news taking arounds that after one of the credit rating agencies downgrading the US rating, the second wave of recession world over is spreading with increasing pace. The European markets (Britain included) in the grip of crisis. So is the case at several other places world over. The debate has already started – Is a double-dip recession round the corner? There may be conflicting views on this as Prof. Bakul Dholakia believes – "Technically to call it a double-dip recession, US has to see two consecutive quarters of negative growth. In 2009, the GDP of US showed negative growth of -2.6% which increased to positive growth of 2.8 in 2010. In 2011, the growth is estimated to be 3%. If US has to hit double-dip recession, the economy has to fall from 3% growth to zero and further down to negative growth, that too for two consecutive quarters. This seems difficult".
Whether we agree with this or not and leave the matter regarding the US economy entering a double-dip recession or otherwise, the recent news tells me that it is experiencing a considerable slowdown with rate of unemployment crossing 9%. Though one lakh new jobs were created in September alone compared to 1981-82, the number of unemployed, is more than doubled. Out of these unemployed almost one-third are likely to be jobless for one year or more which in itself is a record. The only hope is that the US will go for Presidential elections next year and in past 20 years the trend is that the US economy booms in Presidential election year ! This may be some kind of respite for the global economy, as with the US economy looking up, hopefully the global economy also would turn for better. It would therefore be appropriate to derive that any contingency of this kind could only be truly global in a globalized world. The high priests of globalization in India therefore cannot expect that the country would be insulated from this all pervasive crisis. How less or how worst could be the impact of the global economic crisis can only be a matter of debate.
It is impossible within the scope of the space this article would occupy to deal with the subject covering all facets. An attempt will however be made to deal with some issues of common interest.
Prof. Dholakia feels that like in 2008-2009 India may see slow down. This, according to him, may come because under worst circumstances of US hitting another wave of recession, the exports from India may see a decline. We have been oft criticized for not so impressive performance on the export front with our share in the global trade remaining less than 1%. The weakening of demand in the US would definitely affect our IT and Business Process Outsourcing (BPO) sector and the loss of opportunities for young persons seeking employment with attractive salary packages abroad. India's famous IT sector which accounts for an annual revenue of about $50 billion or above is expected to be a major looser.
I would however like to derive a hypothesis that this hitherto termed disadvantage can be a real advantage in the present situation as Indian economy would be to a considerable extend insulated from export performance fluctuations. According to me, the greatest advantage the manufacturing sector especially the FMCG in India has is ever growing middle class markets and as Prof. CK Prahlad termed, a huge bottom of the pyramid market. The increasing rate of urbanization and increased spending of the government through the schemes like MNREGA is bound to leave more personal disposable income in the hands of rural poor. Though it is admitted that part of this will be adjusted against the increased food prices because of inflation, still a reasonable sum will go for non-food items also. This may continue to propel a buoyancy in the local market partly neutralizing the impact of global recession.
As regards the stock market, we are seeing fluctuations. It is my personal belief that partly this is because stock markets across the world are seeing heavy correction in the recent times and partly the global recession might to some extent decelerate the flow of FDI. Though there is no relativity between stock markets and the economy as the stock markets fluctuate on hope or despair which largely depends upon the investor perception and therefore beyond a point the stock markets cannot be used as a barometer to judge the economy.
Perhaps more realistic test of the economic growth could come through the indicators of GDP growth. We were talking of GDP growth clicking around 9% or above. Now the Gross Domestic Product (GDP) in India which historically from 2000 till 2011 averaged quarterly 7.45% reaching a historical high of 11.8% in December 2003 and record low of 1.6% in December 2002 has been showing a continuous decline from a peak of 9.4% in the first quarter of 2010 to 7.7% in the second quarter of 2011 as shown below:
Source: TradingEconomics.com; India Central Statistical Orga
This should not surprise us because according to me there is not a single economy in the world including India which is immune to global turmoil. The global turmoil may see the decline of exports in certain sectors like IT or BPO, readymade garments and fashion wear, manufactured goods, but it will not affect the commodities. On the other hand, countries like China which are having a substantially large share in excess of 12% in the global trade may look at our domestic markets for dumping their products. This should worry our domestic sector of unfair competition and the policy makers must ensure that necessary precautions are taken to prevent unhealthy competition and dumping, safeguarding the domestic sector. To an extent the cumulative effect of all this can throttle the job opportunities and also create sluggish demand in the domestic sector. This could further be aggravated if rain gods are not kind to us and in the near future we have a comparatively bad and erratic monsoon. All these contingencies unlikely to coincide for its optimum impact and therefore appropriate it would be to conclude that while price rise and inflation may continue to haunt our economy fortunately for the conditions peculiar to us even if the globe hits recession, Indian economy may at the worst experience a slowdown.
