No nation is an economic island
The Indian government has been blasé about the economic turmoil in the western world. There are some grounds for this attitude.india Updated: Aug 16, 2011 13:11 IST
The Indian government has been blasé about the economic turmoil in the western world. There are some grounds for this attitude. The Indian economy has weathered, in quick succession, a global commodity price spike and a global financial crisis. It is now about to face the fallout of a global public debt crisis.
On closer examination, this view may be Panglossian. If the world economy does slip into a second recession, it will impact the Indian economy in three negative ways. One will be a fall in export demand. The present de-leveraging problems besetting the US and European economies will, if not managed, slash demand from two of the three biggest markets for Indian goods and services. Exports have been one of the success stories in the past several years, both in terms of growth and diversification. If they run aground, growth, job creation and India's current account deficit will pay a stiff price.
Two, a double-dip will constrict capital flows. The sensex collapse that followed the sub-prime crisis was triggered by the flight of foreign investors needing to cover debts at home. The global corporate sector is far less leveraged today. This could moderate the scale of another ebb of capital. But in times of uncertainty, money seeks safety - a reputation that still evades India. Three, confidence, intangible but all-important in a modern economy, will go downhill. The pronouncements of Indian ministers failed to instill confidence in the post-Lehman Brothers period. Today, when New Delhi has run its political capital down to minimum balance, officialdom's ability to hold up market sentiment is even less likely. India's economy is sound if one goes by the numbers. But the beating heart of the economy is the corporate sector. This creates the bulk of new jobs, pays the most government taxes, carries out most of the country's investment and is the real source of India's dynamism. This sector is wholly globalised. The Tata group, India's largest conglomerate, earns half its revenues overseas. If the world falls to its knees, the legs which hold up India's prosperity will also buckle. The government can compensate - but India is already the most red-inked emerging economy.
Optimists hope a recession will tame domestic inflation - as happened in 2009. This would allow the Reserve Bank to relax its monetary policy, the primary dampener on the economy. This may be wishful thinking. The worst sources of inflation, like food prices, are unaffected by the swings of Wall Street. Inflation-adjusted, oil prices are already at unexceptional levels. And the central bank will probably ignore market whimsy and hold the line on rates.