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Resource centre on India's rural distress
 
 

Don’t uncork the bubbly yet! by Paranjoy Guha Thakurta

That the economies of Asia, in particular China, India and Australia, are responsible for whatever growth is currently taking place on the planet is now acknowledged and underlined by the West as well as by multilateral financial agencies like the International Monetary Fund (IMF) and the World Bank.

The 3.5 per cent growth in the American economy in the July-September quarter has enthused many into believing that the worst of the worldwide economic crisis is behind us.

In India as well, there is no dearth of analysts who are overly optimistic about the proverbial "green shoots of recovery" indicating a bright future.

But this is no time for partying. Not as yet. The problems thrown up by the worst recession the world has witnessed since the Great Depression of the 1930s are not going to disappear in a hurry. Consumption and savings patterns in the United States and China are not to change dramatically. The dollar is likely to become progressively weaker. Trade and investment flows across the globe are expected to remain sluggish.

Even as economic power balances shift eastwards, few new job opportunities would come up, especially in Europe. The International Labour Organisation believes the world will not return to the employment scenario that existed in 2007 for a few more years, at least not until 2011 or in 2012.

As far as the Indian economy is concerned, there is much to be worried about. Agricultural production, after having grown fairly impressively for five years in a row, is going to come down by at least two per cent this fiscal year, or so says Union finance minister Pranab Mukherjee.

Food prices are driving inflation and immiserising the poor despite the government’s rural employment generation programme and the rise in the daily minimum wage to Rs 100.

The labour-intensive export-oriented sector — including textiles, garments, diamond polishing, leather, handicrafts and marine foods — remain in doldrums with no immediate signs of revival, especially with the rupee strengthening against the dollar. Oil prices that are creeping up and are at present hovering around the $80 per barrel mark seem unlikely to come down.

On October 29, the IMF released its "regional economic outlook for Asia and the Pacific" which forecast that Asia would grow by a higher 5.75 per cent in 2010 against 2.75 per cent in the current calendar year. "Just as the US downturn triggered an outsized fall in Asia’s GDP (gross domestic product) because international trade and finance froze, now their normalisation is generating an outsized Asian upturn", the report said, even as it categorically stated that Asia was not decoupled from the rest of the world and that the continent’s fortunes remain closely tied to that of the global economy.

The IMF’s latest forecasts say that the large Group of Seven economies would grow by just 1.25 per cent in 2010 recouping only half the contraction estimated for 2009 because private demand in these countries would remain constrained by the crisis. Consequently, overseas demand for products exported by Asian countries will remain subdued. In this "new world", Asia’s longer-term growth prospects may be determined by its ability to recalibrate the drivers of growth to allow domestic sources to play a more dynamic role.

Chapter III of the report entitled "Corporate Savings and Rebalancing in Asia", points out an interesting paradox. In the past few years, corporate savings have risen even as investments have not picked up. The report raises the question: Why didn’t corporations pay out their profits as dividends, if they didn’t have suitable investment projects? In seeking an answer to this question, the report says greater financial development and structural reform could reduce companies’ need to retain earnings for precautionary reasons.

That indeed is the moot point. Asia and India save and do not splurge on borrowed funds as America does.

That has saved Asia from the worst ravages of the international financial crisis that it had no responsibility in creating. Greedy investment bankers who were responsible for Wall Street melting down in September 2008 were not exactly role models for the people of the East.

On the economy of this country, a just-released report prepared by the Indian Council for Research on International Economic Relations (ICRIER) strikes a cautionary note for the diehard optimists. "Despite signs of recovery from the global financial crisis, the GDP growth rate for (India)… is likely to be between 5.8 (per cent and) 6.1 per cent in 2009-10, below the 6.7 per cent recorded in fiscal 2008-09", the report states.

The ICRIER study points out that "while there has been an improvement in Indian industry, particularly the manufacturing sector, the adverse impact of the fall in kharif production due to a rainfall deficiency will act as a drag on the overall growth of the economy". Importantly, "in the current financial year, the major policy challenges for the government will come from the sharp rise in inflation and deteriorating public finances".

The findings of ICRIER were presented at a seminar organised jointly with the Centre for Monitoring Indian Economy on October 14 that was presided over by Dr C. Rangarajan who is head of the Prime Minister’s Economic Advisory Council. ICRIER’s views, by and large, are quite congruent with those of the government.

The message is coming out loud and clear: the economic situation is far from hunky dory. The party had lasted a pretty long time: the broken bottles have not been picked up, the dishes are still dirty and the mess is yet to be cleaned up.

Paranjoy Guha Thakurta is an educator and commentator