Opinion Revival and challenge
For India, the upturn in the US economy is reason to cheer, and worry.
The US economy grew at its fastest rate in a decade in the last quarter, diverging sharply from the recent growth trajectory of other developed economies. Economic output increased at a rate of 5 per cent in the last quarter, the strongest since the summer of 2003. When combined with a 4.6 per cent growth rate in the quarter before that, increase in consumption growth and falling unemployment, the latest figures indicate a definite resurgence of the US economy. While it is too soon to say whether it will be sustained, it has implications for the rest of the world — including India.
One of the reasons for stronger than expected growth in the US has been falling oil prices. As a result, personal spending has increased more than expected. It must be noted that Opec recently met and elected to ensure that global prices stay low by refusing to lower production. Increased oil prices in the future may have the potential to dampen the sharp growth rate. The US Fed, however, seems confident about the long-term growth trajectory of the economy. It recently altered its announcement to keep interest rates near zero for a “considerable time” by stating that it would take a “patient” approach towards hiking interest rates. This is being interpreted as a sign of both optimism and caution with regard to the domestic US economy.
India has reason for both cheer and worry at this set of announcements. The US is the largest consumer market in the world, and India’s second largest trading partner. Any increase in consumer appetite in the US is good news for Indian exporters. At the same time, a hike in US interest rates will prompt many investors in emerging economies to exit quickly and invest in the US. Such a situation arose last year, amid fears that the US Fed was going to withdraw its quantitative easing policies. Foreign investors exited, the rupee depreciated sharply, and the Reserve Bank and Indian government imposed a set of restrictions on Indian markets, many of which remain. A hike in interest rates in the US would prompt the Indian government and the RBI to take immediate steps to ensure foreign investors continue to find the Indian economy more attractive than the US. The alternative is another set of knee-jerk reactions whose dividends have been debatable, at best.
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