Much is being written in the popular press about the economic turmoil that is gripping the world. Economists opine that it is the worst since the Great Depression of the 1930s. Iceland has declared bankruptcy. European Union has officially announced that it is in recession due to slowdown in successive quarters. Millions of jobs across the world have been lost and as with most crises, economic or environmental, the poor are at the receiving end.
In India projected annual GDP growth numbers are trimmed down every other week and now stands at closer to 6%. The Finance Minister swung both ways (like Ishant Sharma) saying that India’s financial system is insulated from mortgage backed securities crises of the West and at the same time in a globalised world India will be affected. He also expounded that an economic slow down of two percentage points is not job destroying but employment will be created at a lesser pace than before. That does not sit well with World Bank’s statement that for every 1% reduction in growth in the developing world there will 20 million people that will be pushed into poverty.
Reacting to the seriousness of slowdown, the Governments across the world have announced stimulus packages to provide fillip to the economies. The $ 700 billion bailout package of the United States, 50 billion pounds of the United Kingdom and $100 billion of Japan to rescue the financial system are part of folklore now. These fiscal packages are apart from the monetary measures taken through the central banks. Monetary policies have their limitations in stimulating the economy as gleaned from the happenings on in the US where the targeted Federal Funds Rate is close to 1%.
China in tune with their new found reputation, moved aggressively with an announcement to spend an estimated $586 billion by 2010. This would be on building national infrastructure and social welfare projects like railways, subways, airports and rebuild earthquake devastated southwest China. Once again China showed vision and courage by staying ahead of the curve. The Chinese plan is different from the American and British in that it is directed towards the mainstream economy and not the financial system alone. This has parallels in ‘New Deal’ of the President Franklin D Roosevelt post the Great Depression where highways, dams and other physical infrastructure were built and sowed seeds of economic prosperity later. Now the US seems to respond to its Main Street issues with a fiscal package which Paul Krugman’s back of the envelope estimates as a minimum of $600 billion.
On the contrary to what the Finance Minister pontificates about slow job creation, job destruction is happening. A case in point is the Textile Industry which is the largest employer in India employing close to 90 million people. Despite exchange rates soaring to touch Rs. 49 to a dollar the industry is in serious trouble due reduced demand from abroad. Tirupur in Tamil Nadu accounts for close to 30% of textile related industrial activity. The cluster is now staring at 50,000 retrenchments by next March according to Tirupur Exporters Association. CITI (Confederation of Indian Textile Industry) has urged the government to rescue textile industry. High inflation leading to soaring input costs (e.g. Minimum Support Price of cotton has increased close to 20%) and erratic power supply (50% power cut in Tamil Nadu) did not help. Federation of Indian Chambers of Commerce and Industry (FICCI) has sought for interventions for other manufacturing sectors dominated by Small and Medium Enterprises.
The liquidity crunch is exacerbated by withdrawal of foreign investors that deem investment in developing economies to be risky. Foreign Investments have reduced considerably driving the stock market to therapy after being on steroids of 21000. Reserve Bank of India data shows that between April to September 2008 the FII outflow has been $6.6 billion.
Given such a situation, the hallowed triumvirate of Manmohan Singh, P Chidambaram and Montek Ahluwalia was expected to come out with a strategic well thought-out stimulus for the job intensive sectors. But it was not to be. Inaction which characterizes the current Government be it terrorism or farmer suicides or fuel price management is seeping into financial management now which was the ‘final frontier’ where the people of India expected the erstwhile architects of economic reforms to deliver. Only on Saturday the Deputy Chairman of the planning commission announced ‘he was going to push the case for a coordinated fiscal package’. Curioulsy enough the only time the fiscal stimulus was talked about was by the Civil Aviation Minster planning to rescue the airline industry! This is one more pointer that the Congress lead Government is inept in prioritization and is driven by interest groups and nepotism.
Quantifying the size of the package, targeting the beneficiary segments, mustering the resources and coming up with an implementation plan are the need of the hour. The fiscal deficit coupled with costs of executing the National Rural Employment Guarantee Act and the farm loan waiver will definitely put the Government on the back foot. The FRBMA will go for a toss, though there will be nothing new about it. India like many things should take cue from the Chinese for thinking big, planning and executing. India should come up with a plan proactively and quickly. It cannot give excuses this time that it usually does when anything big happens in China, by blaming that the legal and regulatory systems in India would make it difficult.
The superpower of the future should earn the place by showing leadership in acting with tough times. The common man is frustrated with inaction and the lack of foresight and political energy to get things done. Barack Obama won the United Sates election citing the nasty economy to be the result of flawed economic policies of the incumbent. The Bharathiya Janata Party will claim the same in the Lok Sabha polls next summer with virulent phrases like ‘economic terrorism’. The Congress would do well to come out with a workable and executable economic plan quickly. The only ‘fiscal strength’ it has shown so far is in the parliament-in cash that was waded.
