Recession, concession

Recession is a technical term, though often used loosely. The National Bureau of Economic Research8217;s technical definition is rarely used even by the financial press. In the loose sense, the US hasn8217;t had two successive quarters of real GDP decline yet. However, there are early warning signals in retail sales, unemployment rate, manufacturing, bank losses, Wall Street indices, housing and the credit market. Add to that higher oil import prices. If personal and business expenditure don8217;t recover, there could be a recession, with the last occurrence in 2001. The engine of global growth is no longer developed countries. Consequently, one shouldn8217;t overplay the cliche that if the US sneezes, Asia catches a cold. However, a US recession would have adverse effects, on stock markets in emerging economies, including India, and even Indian exports.

That8217;s the background to President Bush8217;s economic stimulus package. First, this isn8217;t an economic reform package designed to solve long-term US problems of loss in competitiveness. It8217;s a short-term kick-start attempt, reminiscent of 2001. Second, we don8217;t yet know the extent of tax relief and its break-up. The figure mentioned is one per cent of GDP, translating to between 140 billion and 150 billion. The bulk of this 100 billion will probably be targeted at individuals and remainder to businesses. Third, broader reforms like increase in food stamps and extension of unemployment benefits have been talked about, but aren8217;t part of the package yet. Fourth, it isn8217;t clear how the revenue shortfall will be met. Much depends on how Congress reacts to the proposals. Fifth, the president argues in his speech that there was tax uncertainty because some tax breaks were due to end in 2010. This can be interpreted as an argument for stability in tax regimes, suggesting the opposite of what Bush proposes. Not since Reagan has any US president attempted this. Stated differently, the package is a short-term redistributive measure, a familiar syndrome in India too. The growth stimulus requires other changes ignored in the agenda. Sixth, not only has the Federal Reserve chairman8217;s testimony to the House Budget Committee not yet occurred, interest rate changes read cuts aren8217;t due till January 30, though nothing prevents earlier action.

In perverse fashion, implications for India aren8217;t always directly economic, but also in policy-making, with a strong sense of deja vu.