VIEWPOINT

The world falters, India booms

Posted on August 5, 2010 | Author: T T Ram Mohan | View 521 | Comment : 8

While the developed world debates withdrawal of stimulus packages and fears double-dip recession, India is eyeing 9% growth on strong savings and infrastructure-driven investment.

artical Picture The divergence between macroeconomic policies in India and those in the advanced economies in recent months has been striking. Fiscal tightening has been under way since fiscal 2009-10 itself. Monetary policy too has been progressively tightened in recent months although it is not as tight as some would like.
    
In the advanced economies, talk of exiting the fiscal stimulus has not been matched by strong action everywhere. There are serious doubts as to whether this is the right time to begin a big exit despite the fact that public debt has reached its highest levels in years. Monetary tightening is not happening. In the US, the Fed is expected be accommodative in its forthcoming monetary policy announcement.
    
The divergence in policies between India and the advanced world reflects divergences in underlying economic conditions. In July, the International Monetary Fund’s World Economic Outlook revised its forecast for world economic growth from 4.2% in April to 4.6%.
    
But this is based largely on expectations of high growth in emerging markets. There is not the same optimism about economic prospects in the advanced economies. Nouriel Roubini, who is credited with having the forecast the global financial crisis, maintains that a double-dip recession is very likely, especially in Europe and Japan.
    
The global financial crisis drew a massive and concerted response from governments in the advanced economies. A massive fiscal and monetary stimulus was adopted. The stimulus worked. It helped a slide into another protracted depression. The world economy recovered and then it appeared to gather steam.
    
So what has gone wrong with the script in recent months? Well, Greece was undoubtedly a big shock to the world economy. Not because Greece in itself poses a problem for the world economy but because it was a symptom of a broader malaise: fiscal overstretch.
    
We have known that governments can spend their ways out of trouble in a recession, but economists insist this is possible only so long as government borrowing does not breach certain limits. There is a sense that once government borrowing reaches 90-100% of GDP, markets will become averse to supporting further government borrowing.
    
When Greece happened, people started looking closely at fiscal deficit projections, public debt-to-GDP ratios and current account imbalances in the advanced economies and were horrified at what they saw. They concluded that there was no choice but to cut back on the fiscal stimulus.
    
Unfortunately, it appears that the recovery is not strong enough to withstand a big exit. Governments in advanced economies are in a fix as to how fast to move in respect of exiting the fiscal stimulus. There is not much that monetary policy can do to provide more stimulus when interest rates are as low as they are today.
    
It is not just the absence of freedom of action in respect of fiscal and monetary policy in the present conditions that worries markets. There have been renewed concerns about failures in the banking sector. Banks in the advanced economies hold large amounts of government debt, so the Greek debt crisis revived fears of another banking crisis.
    
Regulators in the EU ran stress tests on 91 banks. They claimed that the tests showed that the banks could withstand a setback to the world economy except for seven small banks. But the tests have been criticised as being not adequately stringent. Whether there is an implosion in banking again or not depends on whether the EU economies can muddle through long enough without a major default.
    
The Indian situation presents a refreshing contrast. Most forecasts for Indian economic growth have been revised upwards and the revisions are seen as credible despite the uncertainties in the world economy.

Growth is expected to be anywhere in the range of 8.5-9%. There is a clear roadmap for an exit from the fiscal stimulus. Monetary policy has become tighter with fighting inflation the priority now.
    
The PM’s council of economic advisers thinks the projected rise in the savings and investment rate in 2010-11 and 2011-12 provides a firm basis for a return to growth of 9%. In 2007-08, our savings rate was 36.4%. It declined in 2008-09 and 2009-10 thanks to government dis-savings caused by the need to provide a fiscal stimulus.

Thanks to the fiscal corrections introduced subsequently, the savings rate is expected to rise to 35.5% in 2011-12, enough to finance an investment rate of 38%. An investment rate of this order, in turn, can easily deliver growth of 9%.
    
But this begs the question: what happened to the coupling thesis? In 2008-09, we found that we were far more dependent on global economic conditions than we had supposed. As the global crisis peaked, our growth rate dropped to 6.8%. Why should things be any different if the advanced economies were to go through another recession?
    
There are reasons to expect a different outcome now. We were coupled with the world economy not so much through trade as through our dependence on capital flows. In a time of financial crisis, there is a flight to safety and out of emerging markets. This impacts domestic interest and exchange rates. It also impacted corporate investment in India as corporate investment had been financed by foreign borrowings to a greater extent than suspected.
    
In the months ahead, these adverse factors may not come into play. A setback to global growth is unlikely to translate into a financial crisis. Investors are bullish about growth prospects for India and are unlikely to exit en masse if the world economy falters. Indian companies unwound much of their exposure to foreign debt during the crisis and will not have run up similar exposures again.
    
These propositions will be tested if there is a double-dip recession in the advanced economies. If they hold up, that would give us a new basis for confidence as to India’s growth prospects. Unlike in 2003-08, growth of 9% would be less vulnerable to the vagaries of the world economy.

It would be more investment-driven with infrastructure as a key driver. We would then be having the best of both worlds: the benefits that go with integration and the lack of vulnerability that comes with being driven by domestic demand and financed by a high savings rate.

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Comments (8)

  • The common man is suffering in India. The gap between rich and poor is increasing. The economic figures are certainly rosy and there is no doubt that infrastructure will play a role in the GDP growth. The growth is driven by saving rate.
    The key to success is in containing corruption, controling the waste expenditure and employing the savings and tax into future assets which will bring us manufacturing. The foreign participation in no technology area is undesired. First open the country to INDIANS and let them compete.
    The licence raj should be abolished. India as acountry should have uniform rules in all over the country. The basic need of common man like food, shelter and right to education, health, justice and law are to be maintained and protected by the Goverment....See More

    Posted by RAJESH KUMAR AGARWAL , operations Manager at Methanol plant Sohar, Oman | 07 Aug, 2010

  • I don't really want to be a spoilsport but the picture painted is too rosy to be true. Of course we would be able to handle whatever challenges are thrown are way and would continue to grow at a healthy rate but 9% when advanced countries are having double dip recession is definitely too optimistic. What about India's own fiscal deficit? What about the continuous failure in reigning in the inflation? What about our over-dependence on monsoons? What about the corruption reigning supreme in our administration? and on and on.

    Posted by Manoj Kumar , Deputy Commandant at Border Security Force | 06 Aug, 2010

  • The micro level financial displance and fiscal out flow into infrastructure are more scientic than what the west do, because Indian economy is used to living with such uncertainity as at one time we depended on agriculture which inturn depended on monsoon, it may be a story of the past but Indian mindset has not changed and it is for the better of our country.
    When it comes to avg spending per person our citizen are far below in avg spend ratio of the westners and this is due to prudent fiscal management practised from ages there are execeptions and those have suffered huge loss and this current recession has brought them back to basics.
    I dont see any further recession in near future but Indian IT which is looking soley at US and to an extent European markets should look ...See More

    Posted by Ramesh.V.Naivaruni , Business Development Manager at Pride-Group | 05 Aug, 2010

  • the 9% growth may be a slightly higher speculation. Its best to keep it pegged at 7%.

    Posted by Er. Prosanto Kumar Das , MEP Manager at Saudi Bin Ladin Group | 05 Aug, 2010

  • Though it is true that our relevant fundamentals are strong but then how much it can withstand these frequenent disturbances. Our growth and its projection is not only depends on our domestic demands but due to increasingly alignment to global markets, we are vernable to global trends as well. However, effects on our country may not be as severe as the developed worlds but definitely it has some influence. If second depression had to happen then effect on our growth as well as on fiscal front will be worse than the previous time. There will be a significant dent on our ambitions and projections. we will be pulled backwards and it will take much longer time for us to overcome those problems which we are facing today than what we have envisaged earlier. Yes. with proper planning and ...See More

    Posted by Subrata Sen,Associate Vice President at McNally Bharat Engg. Ltd.|05 Aug, 2010

  • Alongwith 9% GDP growth etc. the priority for India should be to reduce income disparities- particularly targetted at improving the incomes & purchasing power of the vast rural population and improving their quality of life by ensuring availability of basic amenities. The enhanced purchasing power of the large rural population will be the future growth engine for the country and provide a sustainable base for the economy. Spread of education, revamping Labour laws , ensuring adequate minimum wages and a proper social security net will go a long way to achieve this goal.

    Posted by Deepak Kulkarni , Chief Executive at Diminco Pacific, China. | 05 Aug, 2010

  • The present situation of the Indian Economy is on the service sector and infrastructure. both will be required to invite substantial investment from foreign countries. Both are essential for the Indian economy itself for sustained growth internally beceuse our people need a very strong service sector and our industries need a proper infrastructure.

    Like the IPL cricket wich itself became a craze, India is capable enough to sustain by itself as we have a diverse economic factors which by itself is a separate world. In no other country we can have an internal game with so much of excitement, and life, like the IPL. Our course correction measures itself like the service sector, infrastructure segment, retail opportunities, which will give a strong push to growth. India is ...See More

    Posted by n gopalakrishnan , Director Markeitng at AV AGRITECH AGRO MACHINERY PRIVATE LIMITED, GURGAON, HARYANA | 05 Aug, 2010

  • Our strength of saving is slowely diminishing,with present stas,and guess , we may not sustain another meltdown.It will be inversely to the Western economies,true , but anty melt down will completely collaps the structure , Look at our Political weakness, So called dull leaders,and their views .
    Can you find a single leader who is concerned about ,what you are trying to forsee, No ,there is no body and do not expect any body to come forward to adress this subject.
    We need Policy thinkers ,like you to bring this on to cooomon man ?????

    Posted by Dilip Kulkarni , Head Projects at KEPL | 05 Aug, 2010

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