The world economy is passing through very turbulent times. But there are some silver linings-a new round of trade liberalisation is to be launched, inflation is low, interest rates are declining, many budgets are in balance, equity markets are showing signs of hope, oil prices are depressed, exchange rate regimes are becoming more flexible and, barring Argentina, emerging market volatility appears to be in check. But all these are overshadowed by the dark clouds of recession.

Technically, a national recession is defined as two consecutive quarters (six months) of declining economic output as measured by inflation-adjusted (real) GDP. There is no accepted definition of a world recession since some countries can be in a recession while others could be growing and overall, the world economy could show positive growth rates. That is what is happening now with the US, Japan and Europe dragging world growth rates down and China, India and Russia pushing them up. On balance, the world economy may still show a positive 1-2 per cent growth in calendar years 2001 and 2002, a growth performance previously seen in 1975, 1982 and 1991.

The last time the world economy was in recession in the sense of a negative growth was in the depression-hit 1930s. A more accurate description of what is happening in the world now is a "synchronised downturn" in the Big Three-the US, Japan and Europe-and a "growth recession" in the global economy. Actually, Japan has been a write-off for the past decade. So what we have to worry about are the other two, specially the US which is the engine of world growth. It will be a time before China replaces Europe and Japan as the rear engine.

A recent International Monetary Fund paper, "The Impact of US Economic Growth on the Rest of the World: How Much Does It Matter?" by Vivek Arora and Athanasios Vamvakidis quantifies the US role. In 2000, US GDP was equivalent in size to about a third of world GDP measured at market exchange rates. The US accounted for nearly a quarter of the expansion during 1992-2000. However, this analysis captures only part of the overall impact on growth since it is confined to merchandise trade. The influence of investment and capital flows, stock-market performance and business confidence and sentiment is not included in such an analysis. Even so, countries like Canada, Mexico, Malaysia, Singapore and South Korea are crucially dependent on US growth. India is much less so since its overall exposure to the US is around 4 per cent of GDP.

In the third quarter of 2001, US real GDP registered a decline of 0.4 per cent and it is widely expected to repeat this performance during October-December 2001 as well confirming that it is indeed in a recession after a decade of unprecedented expansion. GDP data is available only quarterly and continually revised. That is why the Cambridge (US)-based National Bureau of Economic Research, which tracks business cycles, looks at monthly indicators specially on employment. By this measure, the US is already in a recession and in October alone it lost about 415,000 jobs, although that month's joblessness rate of 5.4 per cent was the same as the figure registered in December 1996.

Why is America in recession? September 11 is not the cause. The real reason is the overinvestment and overborrowing spree of the 1990s that could not be sustained. Unrealistic forecasts of productivity growth created an atmosphere of "irrational exuberance". In a way, therefore, the current slowdown is a welcome corrective to the excesses of the 1990s. The expectation of most analysts is that the US economy will show signs of recovery by the second half of 2002. The Bush Administration will use both fiscal and monetary policy aggressively to ensure that this indeed happens, although its prediliction for tax cuts instead of public spending could blunt the efficacy of the stimulus package.

There are two other worries. First, the volume of international trade is not expected to grow in the next year. This could intensify the effect of a recession. Second, when real GDP and inflation are falling as at present, nominal GDP growth also plummets. This increases fears of a deflation and raises the spectre of the 1930s. Paul Krugman, the celebrated economist, in his 1999 book The Return of Depression Economics, wrote that while the world economy may not be in a depression, depression economics has staged a stunning comeback.

For India, while we need to be concerned about the global economy, it is not disaster or devastation time. Of course, the world slowdown will be used by the government as an alibi for our growth deceleration. But the present pause gives India yet another opportunity to push through its domestic reforms agenda and restore its growth momentum.

(The author is with the Congress party. These are his personal views)