The world is stepping out of the deepest recession since World War II within a year of being plunged into it, thanks to the largest coordinated bailout in history. The composite leading indicators tracked by the Organisation for Economic Co-operation and Development (OECD) are showing stronger signs of recovery in the seven richest countries (G7) and in the four advanced emerging economies: Brazil, Russia, India and China (BRIC). The governments of 20 countries that produce 90 per cent of the world’s GDP have committed nearly $2 trillion to crisis-related discretionary spending, which, an International Monetary Fund (IMF) study reckons, could add 1.2-4.7 percentage points to the bloc’s output in 2009 and 0.1-1 percentage point in 2010. But this process is not painless — the public debt in the G20 will climb from 62 per cent of its GDP in 2007 to 82 per cent in 2010.
The cost of servicing this debt will be the single most important input in decisions to roll back fiscal stimuli. Premature withdrawal of government spending risks nipping the recovery in the bud. On the other hand, if governments continue to pump more money than is needed, rising interest rates will undermine whatever revival has been achieved. Since countries are at different points on the turnaround graph, fiscal rollbacks will occur at different times. When they do, they will have to be large: to regain its 2007 position, the world needs to bring down its fiscal deficit from 7 per cent to under 1 per cent, a process, the IMF paper says, that could drag on beyond 2016.
The worst may be behind us, but it is a hard climb out of the fiscal hole the world has dug itself into. And it is harder for an India that went into the slump with an inordinately high debt-GDP ratio of 80 per cent and an ambitious social spending programme. Recession-induced discretionary spending is only 14 per cent of India’s overall fiscal expansion in 2009. Scaling down this component counter-cyclically does not address the issue of burgeoning subsidies and income transfers. Being among the first major economies to shrug off the recession, India must also be among the first with a plan to reconstruct its exchequer over the next five years. The central bank, with an eye on an explosive inflation situation, has been flagging an exit strategy for a while now. It is time North Block caught the signal from Mint Road.