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VIEWPOINT: KAUTILYA
Global Cooling Not Warming
India's message — don't do anything, nothing will
go
wrong — can't continue
By Jairam Ramesh
Hardly has the dust
settled on the debate over global warming kicked up by the US's withdrawal
from the Kyoto Protocol than we are in the vortex of what is being called
"global cooling". This has also raised fears of a contagion
of the type that rocked the global economy during 1998-99.
In the quarter ending June this year, the US
GDP grew at a seasonally adjusted annual rate (that is, over the same
quarter in 2000) of a measly 0.7 per cent, the slowest in the past eight
years. The "deepest investment slump in a generation" has intensified
and personal consumption growth has also slackened. The US slowdown is
having its most direct impact on east Asia-Singapore, Malaysia, Indonesia,
Philippines, Hong Kong, Taiwan and South Korea. Forty per cent of their
exports to the US are it-related. These countries do have a healthy level
of foreign exchange reserves and are running current account surpluses.
But currencies are taking a sharp tumble and growth forecasts have been
slashed. To make matters worse, Japan, the world's second largest economy,
continues to be in the doldrums.
 Meanwhile,
Argentina totters, weighed down by a continuing recession and huge fiscal
deficits. Its woes are beginning to have an impact on Chile and on Brazil,
which had been bailed out just two years ago. The country's currency,
the real, has depreciated in value by almost a quarter over the past six
months. When a currency loses value sharply, the value of dollar-denominated
debt increases. In addition since governments seek to prevent the slide
by boosting interest rates, the economy also slows and prices shoot up.
Mexico may escape the ill-winds from Argentina but it is unlikely to be
insulated from the American deceleration.
Gloom is spreading in Europe as well and Germany,
its motor, is expecting no more than a 1-1.3 per cent growth this year.
Russia which grew at 8 per cent in 2000 has been unable to sustain that
pace. Poland looks vulnerable. Turkey is also in dire straits with a plummeting
lira, runaway inflation, weak banks, spiralling real interest rates and
a huge debt to be serviced. Turkey is in a peculiar bind. Its policies
have drawn appreciation from the IMF but the markets have been unimpressed.
In an unprecedented move, the outgoing deputy managing director of the
IMF, the redoubtable Stanley Fischer, made a public appeal on July 13
to markets to take positive note of what Turkey is achieving. But it is
not just markets which have reacted negatively. Recently one of Turkey's
most respected economists, Oktay Yenal, who incidentally had a long association
with India while he was with the World Bank, dubbed the IMF as the Irresponsible
Monetary Fund for what he calls the dubious analyses and cavalier changes
in policy prescriptions.
The only robust performer is China which keeps
going on its 7-8 per cent growth trajectory buoyed by booming domestic
demand, deep reforms and an export basket comprising largely of consumer
goods which, unlike that of its east Asian counterparts, is not as vulnerable
to the business cycle in the US. But even though China's growth continues
unabated, it will not, for some years at least, be able to fill the regional
and global gap caused by Japan's sclerosis.
With a good monsoon, India will probably clock
a 5-6 per cent plus rate of economic growth this year. But what is most
worrisome is that Indian industry is in the midst of a severe growth slowdown
since December 1999, with the growth rate declining for six consecutive
months to May 2001. However, it is being spared the Turkey and Argentina-type
disasters mainly due to five factors:
the structure of our foreign debt and its magnitude
(as a proportion of the GDP and of exports) are dramatically different
and the volatile short-term debt as a proportion of foreign exchange reserves
is vastly lower; the overwhelming proportion
of portfolio (FII) capital is in equities; the
current account deficit is under control not only due to software exports
and remittances but also because of growth stagnation; our exchange-rate
management strategy of a "dirty float" has been very pragmatic;
and we still retain a variety of controls on the free entry and exit of
capital, specially for domestic residents.
But the fact is also that the anaemic pace of
reforms itself may have protected India from any "external"
collapse. But this external/internal dichotomy should not be overdone;
for example, the failure to sustain import liberalisation is impacting
on industrial growth. The consequences of homoeopathic reforms in UTI,
IDBI, IFCI and other financial institutions are also unfolding. And for
how long can we ignore the serious crisis caused by stagnant investment
in physical and social infrastructure on account of a structure of public
expenditure that bears no relation to pressing socio-economic concerns
and challenges?
(The author is with the Congress party. These
are his personal views.)
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