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The idea that the Indian economy should in turn slow down because of the global slum is a red herring for a number of reasons.
If by way of one extraordinary example we look at the Stalin regime of the Soviet Union which achieved real growth rates of 20% annually from 1928---1941, despite the Great Depression of the late 1920's and early 1930's proves that Global Depressions can be overidden by effective central governments which set forth specific agenda's to stimulate their economy, without creating inflationary situations (throwing more money at people in the hope that they spend it is a lazy ill advised solution).
But ManMohan Singh as Comrade Stalin? With the Politburo run by Chairman Soniaji.
Pay rises, and tax cuts don't necessarily translate into more expenditure, and consumption by ordinary people, which in turn stimulates the economy theoretically. If the Popular PERCEPTION is that there is a slum in the economy then that tax cut, and pay rise will go into savings for the future........
So the Indian government has to think of stimulating the economy in other ways.
Infrastructure is one, especially power.....never enough......and further comprehensive economic reform, that remove the shackles of bureaucracy/red tape.
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Won't get better soon, learn to live with slowdown.
SA Aiyar Times of India columnist.
Indian politicians and citizens are mostly in denial about the impact of the global meltdown on India. Politicians make brave statements laughing away the slowdown, saying India will be least hit and first out of the slump.
(Well Mr. Aiyar they are right in one sense, or in many senses...........Indian exports form a very small % of the overall Indian economy...GDP to Export ratio $175 billion (2008-9 March), and imports about $265 billion (2008-9 March). Whilst a slow down of exports might reduce GDP growth one does not think the level of imports growth/determines a slower economy would it?
If India's economy by PPP is anything between $3,400 billion to $4,000 billion (2009), why would the slow down in the global economy affect the Indian economic growth....where exports account for for a mere 4--5% of the real GDP measured by PPP.
Or lets put it another way. If Indian exports were approximately $140 billion for FY 2007-8, and $175 billion for FY 2008--9, BUT projected exports should have been $190 billion, and GDP growth of 8%, but was not reached because of the global slowdown allegedly. Would the $15 billion in the shortfall of the export target explain why the WHOLE economy grew by say only 5% in FY 2008-9, and not 8%, or would there be other factors?
Since 1991, and the reforms of the Indian government, what % of the overall growth in the Indian economy is the result of the comprehensive reforms of the Indian economy, and what % of that miracle growth of the Indian economy is the result of the "global economy"?
I would say Mr. Aiyar given the very small percentage of Indian exports as per the overall economy that the global economy has played a very small role, and that the greater % of that miracle Indian growth has been due to economic liberalisation in India. And if the economy is slowing down this is because Congress has not instituted enough new reforms in terms of unshackling the Indian economy to take it to greater heights.
I have read commentator after commentators from the WSJ to other newspapers columnists which said that the Indian economic miracle could not be sustained unless and until the Indian government instituted the next phrase of reforms..............this is 2000/2002, where they stated clearly that for India to break into and sustain the 10% annual growth target, the Indian government had to institute comprehensive new reforms other than those that were instituted in 1991, as result of the serious situation in that year.
I think this is the key. This is what the next government has to do after elections.
Three stimulus packages in three months have been announced with fanfare. But the slowdown continues. Impatient citizens and Opposition parties demand additional stimuli. But this rests on the illusion that the economy will return to fast growth if only it imbibes enough caffeine.
(Such things can stimulate inflation......more than anything else, and crowd out good investments. I think its not about giving away money which has been borrowed, but reforming the economy, removing the shackles, and investing in infrastructure..)
Sorry, but this is not a problem of caffeine shortage. The world is going through the worst downswing since the Great Depression, and India willy nilly has to go downward with the rest of the world. We should expect the slowdown to continue for several quarters, until the world economy recovers. We must batten down our hatches and patiently ride out this storm.
(I disagree.....I think that is a cliche line of a lot of economists.........its a mindset, that simply does not apply to India, and does not have to apply to India. Stalins Soviet Union and Roosevelts America a little later disproved that theory.........the "reality" of the depression....but obviously you need a strong cohesive government which knows what it is doing at the center)
Official data have just revealed the ugly truth that GDP growth declined to a dismal 5.3% in the October-December quarter, way below official expectations.
(Did Mumbai 26/11 have an impact on this? or the talk of war?)
Agriculture declined by an unexpected 2.2% in this period: poor harvests of sugarcane, cotton, pulses and oilseeds overwhelmed gains in rice, horticulture and animal husbandry. In this quarter, the Pay Commission award boosted community services growth by a whopping 17%. This is mostly illusory: higher pay does not mean better service. Despite this illusory boost, overall GDP growth only touched 5.3%.
(I agree that pay increases is not the way forward towards boosting the economy, but the key is about removing the bureaucracy so that ordinary people in small, medium and large enterprises can make things in peace and sell into the vast Indian economy..........in their local, in their state, and nationally, through good insfrastructure and especially transport)
This lends credence to the IMF’s forecast of 5.1% GDP growth for the calendar year 2009. We may experience some small improvement in the last quarter of 2009, but a return to fast growth will have to wait till late 2010, or even 2011.
Let nobody think that more stimulus packages will somehow save us.
The slump was not caused by lack of government stimulus — it occurred despite an enormous stimulus from Chidambaram’s 2008 budget through the farm waiver, Pay Commission award, and spiraling subsidies for petroleum products, fertilisers and food. Because of these — and falling tax revenue — the overall fiscal deficit of the Centre and states in 2008-09 will be a massive 11% of GDP. Yet, this massive stimulus proved helpless to combat the global downswing.
India’s 9% growth in the preceding five years was due to an unprecedented global boom, not great reforms or cleverness on our part. A huge global tide lifted all boats — even Africa grew at an unprecedented 6%. Alas, the tide is now falling, and lowering all boats. Drinking more caffeine will not raise India’s boat in a falling tide.
We must accept that we are part and parcel of the global economy. The global boom drove up our growth to 9% and the global slump has lowered it to 5%. We must abandon the illusion that we can somehow grow fast again while the rest of the world stagnates. We must learn to live with the global downswing, and ride out the storm. We cannot end the storm on our own: we must patiently wait for it to subside.
(With exports of $175 billion out of an economy of between $3,400 ----$4,000 billion, I am not sure India is that much part of the global economy; its decidedly disconnected)
Meanwhile, our aim must be to alleviate pain, and build infrastructure for future growth. Seen in this light, the so-called stimulus packages are actually alleviation packages. They are worthwhile measures to alleviate economic pain, and stem deterioration. But they cannot stimulate the economy back to fast growth. This crisis was not caused by us and cannot be solved by us. Our role is to ride out the storm.
What policy lessons flow from this? First, lower your expectations and targets, for false hopes can lead to policy excesses. Second, overhaul procedures for infrastructure contracts, because red tape currently prevents accelerated spending in this vital sector.
Third, don’t cut taxes endlessly in the hope that this will revive the economy. Taxes should of course be cut in a downswing, but should then be raised again in the next upswing. Raising taxes is politically far more difficult than cutting them. I support the tax cuts so far, but oppose any further cuts on the ground that they will be too difficult to reverse later.
Instead, the Reserve Bank of India should loosen its purse strings, and pump more cash into the economy. Today, huge government deficits are swallowing up all bank finance, leaving little for corporations.
This squeeze has lifted interest rates for corporations even as the RBI cuts its own rates. So, the RBI must abandon its taboo on buying government bonds, and print currency to finance the government’s deficit. This has inflationary potential, but inflation is not today’s problem. Politically, printing money is more easily reversible than cutting taxes further. That’s the way to go.
