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Friday, July 30, 2021

Come September

India might recover before the world does. But it will take time anyway

Written by Bibek Debroy |
January 6, 2009 11:35:02 pm

Singapore-based Business Times has just carried an interview with Arun Shourie. It has a good quote. The question was about decoupling and India’s insulation from global financial crises.  Shourie said,“Suppose the water is just one centimetre below my nose,but it is six inches below your nose.  I might be relatively less affected than you,but if the water around me rises by one centimetre,I will drown.” Business Times probably got one centimetre and six inches mixed up: reversed,the quote makes better sense. Everyone agrees India hasn’t been as hard hit as other countries. A columnist (Daniel Gross) has written a partly tongue-in-cheek piece,correlating exposure to financial crisis with concentration of Starbucks outlets. The correlation works well,both inter-country and between American states. To state the obvious,Starbucks is absent in India.  The company withdrew its application from FIPB (Foreign Investment Promotion Board) and registration of trademarks or selling products through PVR multiplexes doesn’t count. Nor does Barista. 

I possess a colour-coded country risk map prepared early in 2008.  This grades countries from AA to D.  AA merits dark green,D merits red.  This isn’t about economic risk alone.  With a rating of B,India is light pink,floating around in a sea of dark pink and red.  The dark greens of the world are Australia,Japan,Singapore,West Europe and North America. Iceland is light green.  The 2009 map should be easy.  Leaving swathes of the world intact,one can reverse colours for North and South America and similarly reverse them for West Europe and chunks of Asia.  Saying India is relatively insulated is one thing,saying it is completely insulated is another.  No one believes the second proposition any more.  With 7.6 per cent GDP growth in first half of 2008-09,a consensus has emerged that growth this year will be between 6.5 and 7 per cent.  The difference between 6.5 and 7 per cent is explained by how bad one believes Q3 and Q4 to be.  We won’t officially know until CSO releases Q3 figures towards the end of February. Similarly,consensus has also emerged Q1 and Q2 of 2009-10 will be the worst,with growth recovering in Q3 of next financial year for India,though not necessarily for the world. 

In general,slowdown in developed world has differing effects for developing countries. First,exports,foreign investments (direct and portfolio) and ODA flows suffer,as do poverty-reducing effects of growth. Second,government revenue,driven almost entirely by taxes,is adversely affected,limiting fiscal space available to governments. Tax revenue in developing countries is more concentrated,and more sensitive to lower growth,than developed countries.

Third,there are differential spatial effects,since those who are more integrated and connected with global and national markets suffer more.  After the East Asian crisis,there was some interesting work there.  Rural poor in Indonesia suffered less than urban poor,but rural poor in Thailand suffered more than rural poor in Indonesia,because rural poor in Thailand were more integrated with urban markets.  Fourth,poor are more vulnerable to shocks in the sense that if shocks cross a threshold,there are long-lasting effects on poverty,even after the economy recovers,since debt increases,productive assets like livestock and land are sold and children are taken out of school.  Nutrition levels also suffer.  Assuming recovery in Q3 of 2009-10,how bad will the next financial year be?  We don’t quite have a figure from government. The PM’s Economic Advisory Council hasn’t stuck its neck out,implicitly suggesting 7 per cent should be possible.  The PM’s and the former FM’s 7 to 7.5 per cent are from a time when government still pushed the decoupling hypothesis. The RBI governor has said next year will be worse than this one. In what seems to be informal prognosis,Chief Economic Adviser still roots for 8.5 per cent.

Non-government actors are more forthcoming.  However,one should dispose of ICRIER first — a study quoted more and read less.  ICRIER never said 3.9 per cent for all of 2009-10.  That was a figure for the first half of the year,since the global shock was superimposed on slowdown caused by monetary tightening.  ICRIER apart,we have forecasts (Assocham,Allianz,Morgan Stanley,Citibank,Goldman Sachs,Merrill Lynch,Nomura,World Bank,IMF) ranging between 5.3 per cent and 6.5 per cent.  There is a 3.5 per cent from First Global floating around,but it’s not clear what this is based on and whether it is for the full financial year. If you err on the side of 6.5 per cent this financial year,you err on the side of 5.5 per cent the next financial. And if you err on the side of 7 per cent this financial year,you err on the side of 6.5 per cent the next financial. 0.5 to 1 per cent is shaved off from whatever is believed to be trend growth,after allowing for slowdown resulting from monetary tightening. Counter-cyclical options through fiscal policy are limited.  Fiscal policy measures,including those announced on January 2,have limited impact and are quantitatively insignificant. Life would have been different had fiscal reforms been introduced in years when the going was good.

State deficits declined because of good growth and buoyant tax revenue. With growth down,gross state-level fiscal deficit will increase to around 3 per cent of GDP. With unbudgeted items (debt waiver,pay commission,NREGA) and off-budget items (oil,food,fertiliser),the Centre’s contribution to deficit (not just the technical fiscal deficit) will be 7.5 per cent of GDP,if not 8 per cent.  After May 2004,a long list of structural reforms was on the agenda.  With little accomplished in 57 months,what does one expect in the remaining three? (The elephant,an image for the Indian economy,and perhaps government,has a gestation period of 22 months.) This reduces counter-cyclical possibilities to monetary loosening alone and the January-2 dose can’t possibly be the last.  All takes on inflation are based on point-to-point WPI.  WPI-based point-to-point inflation was high from January to April 2007. Therefore,WPI-based inflation will be low for next few months (not to forget indirect tax and petro product price cuts) and by this indicator,will be down to less than 5 per cent by the time elections are announced. Hence,a further infusion of liquidity and interest rate cuts are eminently doable. When will these lead to investment and consumption expenditure revival? With political uncertainty thrown in,that’s unlikely to occur before Q3 of 2009-10,with a longer time-lag for the former than the latter. There is an album titled “Doom,Gloom,Heartache,and Whiskey”. India’s doom and gloom may have been exaggerated. But there is plenty of heartache and whiskey won’t flow until September 2009.

The writer is a noted economist 

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