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India must inoculate itself from the global economic slowdown fulled by the US sub-prime crisis, writes Sitaram Yechury.Updated: Mar 19, 2008 22:54 IST
The US economic slowdown that is clearly slipping into a recession is bound to have serious repercussions on the global economy. More importantly, it is destined to impact on the Indian economy shattering the illusions of comfort that India is insulated from all this as reflected in President Pratibha Patil’s address to the joint session of the Parliament recently. This US economic slowdown is not only a cyclical manifestation associated with capitalist development as President George W Bush sought it to be by saying, “In a vibrant economy, markets rise and decline. We cannot change that fundamental dynamic.” Rather, this crisis is an inevitable consequence of the path of globalisation that is unfolding in recent decades.
Two important features of globalisation require attention. First, this process has been accompanied by growing economic inequalities both within countries between the rich and poor and between the rich and the poor countries. The Human Development Report 2007-08 confirms this with undisputable statistics. Forty per cent of the world’s population living on less than $ 2 a day accounts for 5 per cent of global income while the richest 20 per cent accounts for three quarters of world income. More than 80 per cent of the world’s population live in countries where income differentials are widening.
Second, globalisation has given rise to the phenomenon of ‘jobless growth’. The growth of employment has always been lower than the GDP growth rate globally. Both these features put together mean that the purchasing power of the vast majority of the world’s population has been declining. Now, capitalism inevitably plunges into a crisis when what is produced is not sold. Under these circumstances, the only way that capitalism can sustain its levels of profits is by encouraging people to procure loans whose spending will maintain the levels of economic activity. However, when the time comes to repay these loans, there is the inevitable default.
This is precisely what has happened in the US in the current sub-prime crisis leading to a sharp fall in housing prices with large defaults on home loans. This adversely affected financial firms that held derivatives on home loans. Some of these have already gone bankrupt and many others are facing such an immanency. The size of losses on sub-prime home loans is estimated at $ 400 billion. What goes unreported, however, is that those who do not repay loans are ruined.
This should not really come as a big surprise. The Wall Street Journal reported on October 12, 2007, that the wealthiest 1 per cent of Americans earned 21.2 per cent of all income in 2005. This increased from 19 per cent in 2004 and exceeded the previous high of 2.8 per cent in 2000. In contrast, the bottom 50 per cent earned 12.8 per cent of all income, which was less than 13.4 per cent in 2004 and 13 per cent in 2000. The consequence of such growing inequalities would lead, according to Merrill Lynch, to a fall of $ 360 billion in consumer spending during 2008-09. This only means that the crisis will intensify.
While the rich have been earning their super profits by urging the poor to take loans, the resultant crisis from the fall has inevitably hurt those very sections of the poor further. On January 4, the Bureau of Labour Statistics in the US reported that the unemployment rate has risen to 5 per cent, while non-farm payroll employment remained stagnant. Home sales had declined by 20 per cent.
While the US is seeking to tackle this prices with President Bush announcing a $ 145 billion tax relief and reducing the interest rates, it adversely affects all of us. The UN World Economic Situation and Prospects 2007 fears that this crisis could slow down growth of the US economy by over 2 per cent and that of the global economy by at least 1 per cent.
For us in India, what is of vital concern beyond the general impact of this crisis on the global economy is the manner in which the US is seeking to come out of this crisis. One direct consequence of this has been the weakening of the dollar. This is, in fact, being permitted by the US to secure a higher demand for its goods and services in the global market with a cheaper dollar. In the last quarter of 2005, the US current account deficit was 7 per cent of GDP. This has shrunk to 4.9 per cent in the last quarter of 2007. This shows that the weakening of the dollar roughly contributed to at least 2 per cent higher global demand for US goods and services.
A weakening dollar also contributes to a transfer of resources to the US at the expense of the developing countries that hold US financial assets. Currently, the developing countries together hold over $ 3 trillion foreign exchange reserves apart from the many trillions held in US financial assets. For every $ 100 held, a decline of 10 per cent in the value of the dollar constitutes a transfer of $ 10 back to the US. For $ 1 trillion, this would be a transfer of $ 100 billion.
This has an inevitable negative impact on developing countries, particularly for us in India. The consequent appreciation of the rupee by over 11 per cent during the last year has seriously affected Indian exports. Textiles, the largest net export earner, has seen a decline of -7.9 per cent in its total revenue and profit margins. This is expected to rise to -10.8 per cent in the next six months. The other important export earning sector, leather products, saw declining profit margins of -8.8 per cent that is expected to worsen to -13.7 per cent. The impact of this is not merely the widening of our trade deficit to unmanageable levels. This is leading to the closure of many export units in the country. For instance, the garment industry in Tamil Nadu’s Tirupur, the hosiery capital of India, expects a job cut of nearly 60,000. Thus, the Indian economy pays the price for the US crisis with job cuts and consequent decline in purchasing power among our people. The demand for consumer durables has fallen from a 50 per cent growth last year to 20 per cent this year. This comes on top of the widening economic inequalities already in place in India.
Further, in order to cut their losses back in the US, foreign institutional investors, having made their quick super-profits in the Indian stock markets, are now fleeing. This is not merely fuelling speculative uncertainties but it is also ruining many a small investor.
If India needs to insulate itself relatively from this crisis, then it must abandon all such measures of financial liberalisation that will inexorably tie India to the growing global uncertainties. Unfortunately, however, the roadmap presented in the Economic Survey speaks in terms of opening up all sectors to greater foreign capital inflows. So far, due to the Left’s opposition, the privatisation of pension funds, the takeover of domestic banks by foreign capital, the raising of ceiling for FDI in insurance and other sectors have been kept on hold. Just as well. Otherwise, the impact of this global crisis would have been more crushing on India’s poor.