The Year's Trends

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The US economy had been faltering since April this year. Nevertheless, there were economists who believed that the slowdown would not last long enough to deserve the label "recession". Then came 9/11; the Twin Towers were struck and with that all vestige of optimism vanished. In October, 468,000 jobs were lost in the US; the figure for November was 331,000. Together, this constituted the sharpest decline in employment in 20 years.

A typical recession in the US lasts for 11 months. My prognosis is that this one will last longer and will turn into stagflation-a recession (or stagnation) accompanied by inflation. When the US economy stagnates, it has ramifications for all nations around the world and India will no doubt feel the chill. Though, I will argue below that the consequences for India need not be as dire as for many other nations.

BUSINESS AS UNUSUAL: The US Administration is trying its best to boost consumer spending to revive the faltering economy

While the US recession is unavoidable, my reason for fearing inflation is based on the apprehension that the US Government's response to the recession is inappropriate. America's is the most statistically monitored economy in the world. All sales, manufactures, financial transactions and even consumer mood swings are tracked, loaded on to computers and scrutinised by experts. It is, therefore, not a lack of information that is the basis of Washington's inadequate response to the crisis. It is founded in a misunderstanding of the nature of this recession.

Most recessions or depressions are founded in consumer despondency-a feeling among consumers that they are poorer than they think. So they cut back on spending across the board and the feeling becomes a self-fulfilling prophecy. Hence, the standard recipe for a recession, ever since Keynes wrote his General Theory in 1936, is to somehow boost consumer spending. And so the Republicans are calling for a tax cut, and the Democrats want more benefits to be given to lower-income households. Between these I prefer the latter.

THE ECONOMY

HALL OF FAME Hero of the year: Budget 2001 Zero of the year: Budget 2001's non-implementation Financial villain of the year: Ex-UTI chief P.S. Subramanyam Arrest of the year: Ketan Parikh's Product revival of the year: Indica Chart buster of the year: Cellular phone connections Most populist politician: Ram Vilas Paswan Biggest bankruptcy: Enron Corp's collapse in the US Economic disaster of the year: Fall in exports

India will feel the US recession in the form of weaker export demand. Two-thirds of Indian software production is exported and, of this, 60 per cent goes to the US alone. As far as general merchandise goes, 20 per cent of our exports go to the US. These are bound to be affected adversely by the depression. Nevertheless, it is possible for India to bounce back quickly to a more robust growth path. The reason is that India's total international exposure continues to be very small. Our exports constitute only 9 per cent of our national income. Compare this to China's 23 per cent or South Korea's close to 40 per cent. The total amount of foreign direct investment and portfolio investment that comes into India is about 1 per cent of its national income. This is not something to be proud of but in times of global crisis, such as now, it gives India a buffer. It means that even if the foreign sector does badly it need not shake the economy to the core.

Deteriorating export performance will probably cause our growth rate to dip but this need not be too sharp. From the current annual GDP growth of 5.2 per cent we may go down to below 4 per cent in 2002. But that is not bad compared to most other nations, many of which are having to cope with zero or even negative growth.

India's biggest danger is not the recession but the Government's apathy.

India's big danger is not the global recession but our Government's apathy. Given our low international exposure and the huge inefficiencies and unused capacity, it is feasible for the Indian economy to rapidly recover after a short downturn; and to move to the higher growth path of 8 per cent per annum. What we need for that to happen is initiative and intelligence on the part of the Government but these are, regrettably, in short supply. After the remarkable performance of India from 1994 to 1997, the pace of progress has steadily slowed. Savings, which are the backbone of growth, have slid from 25 per cent of GDP in the mid-1990s to 22 per cent. This is caused primarily by increased wastefulness in government and dissaving by the public sector. It is sad that little effort has been made to trim down government consumption. Growth needs investment in infrastructure-roads, railways, ports and power. Very little is happening on this front. Nothing thwarts new business initiative and efficiency and saps the morale of ordinary people as much as corruption. When the BJP-led Government first came to power, there was hope that, whatever else it did or did not do, it would make a dent in corruption, which in India had reached endemic proportions. But nothing has happened on that front. Controlling corruption needs very little resources. It needs ideas and a little resolve at the highest level of government.

The Indian economy is poised for progress. Our software sector is globally reputed and our pharmaceuticals industry is making its presence felt in the world economy. We may at last be in a position to improve the conditions of the poor by seizing this momentum. It will be a pity if all this is allowed to pass and we slide back to the familiar path of low-level safety, the price of which is invariably paid by the poorest sections of our nation.

The PMO needs to be much more proactive in terms of economic policy than it has been. Read a Chinese newspaper and it is obvious the high level of engagement its government has in economic policy. It is not surprising that China has maintained a growth rate of close to 8 per cent through this global depression and its population below the poverty line is rapidly declining. The Indian Government should invite new ideas for economic development, give them shape and then provide leadership in carrying them through.

The global depression will probably pass us by lightly. But it will be a pity if we remain content with such a myopic objective. Too many people in India still live too poorly for such complacency.