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| Shankar Acharya: Crisis and Growth | | A PIECE OF MY MIND |
| Shankar Acharya / New Delhi Dec 11, 2008, 00:36 IST |
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The global financial and economic crisis keeps getting worse. A couple of weeks back the giant Citibank had to be bailed out with several hundred billion dollars in cash and guarantees from the US authorities (“Citi never sleeps”…but apparently its management dozed off during some crucial decisions last year). Last week America reported November job losses of more than 530,000, the biggest single month figure since 1974, taking the US unemployment rate to 6.7 percent, the highest in 15 years. The US, Eurozone, UK and Japan are now officially in recession, in the sense of having experienced two successive quarters of negative growth. Several analysts predict that the rate of contraction of the US economy in this final quarter of 2008 may be at an astonishing annual rate of 4 to 5 percent. Similar pessimism pervades the other two largest economies in the world: Europe and Japan. There is enormous uncertainty about the depth and duration of the current global recession. But the majority of expert opinion now concedes a substantial likelihood that this will be the worst recession since the Great Depression of the 1930s.
Both the severity of the financial crisis and its massive collateral damage to the real economy have confounded the optimists over the past year. Quite often, experts claimed that “the worst of the financial crisis is behind us”, only to be bush-whacked by the next big bail-out or credit seizure. Equally remarkable, and much worse in impact, has been the speed at which the cumulating financial crisis has throttled real economic activity since summer 2008. The rapid onset of recession in industrial (advanced) countries has clearly overwhelmed the forecasting abilities of many institutions, including the IMF. As recently as July this year, the IMF foresaw the world economy growing at 3.9 percent in 2009, advanced economies at 1.4 percent and developing countries at 6.7 percent. By early November (just four months later) these forecasts had been slashed down to 2.2 percent, minus 0.3 percent and 5.1 percent, respectively (see table). For its projections of US economic growth in 2009, the IMF swung from plus 0.8 percent in July to minus 0.7 percent in November! And it’s a safe bet that if the IMF were making a fresh set of projections for 2009 today, all these numbers would look even worse.
Nor does the recent “advance release” of the global outlook for 2009 by UNCTAD provide any succour. Like the IMF, the UNCTAD foresees global growth at just over 2 percent in 2009 at PPP weights and at only 1 percent at market exchange rates. The latter number means that global growth in 2009 is expected to be at only about a quarter of the pace enjoyed in 2006 and 2007. Both institutions forecast severe damage to world trade, which is expected to expand at only 2 percent in 2009 as compared to over 9 percent in 2006 and 7 percent in 2007. For the Asian giant, China, both the IMF and UNCTAD expect growth to slow to about 8.5 percent in 2009 from the scorching 12 percent pace of 2007. Interestingly, several China-based analysts foresee much sharper deceleration.
What about India? How bad will it get for us? The official estimates of GDP growth for the first two quarters of 2008/9 stayed above 7.5 percent. However, industry-wide indications after September are uniformly gloomy. There are reports of significant declines in output of automobiles, commercial vehicles, steel, textiles, petrochemicals, construction, real estate, finance, retail activity and many other sectors. Exports fell by 12 percent in dollar terms in October and advance information points to a similar decline in November. After September, the economy seems almost to have gone over a cliff. When available, the official data are likely to record a sharp slowdown in the second half of the year, possibly steep enough to drag full year growth in 2008/9 to below 7 percent. What’s more, given the strongly recessionary conditions expected to prevail in the world economy in 2009, there is no prospect of a quick turnaround in India. Indeed, on a tentative basis, I would suggest that we might be lucky to achieve GDP growth of even 6 percent in 2009/10.
What about economic policy? Can we not deploy monetary, fiscal and exchange rate policies to insulate our growth momentum from adverse external conditions? The short answer is: only to a limited degree. I outlined the main arguments last fortnight (BS, November 27). Monetary policy had already been aggressively loosened by early November and the RBI provided a further, well-balanced package last Saturday, notably including a 1 percent cut in the repo and reverse repo rates. Given the continued high rate of CPI inflation through October (latest data) and, perhaps more significantly, recent pressures on the exchange rate, the present scope for further policy rate reductions appears limited. That situation might change if external imbalances improve if a falling oil import bill and slowing non-oil imports outweigh the drop in export earnings and if capital flows stabilize.
On the fiscal front, the government had pretty much exhausted the available fiscal space through its record Rs 237,000 crore (4.5 percent of GDP) supplementary demand in October. Though undertaken for quite different reasons, its timing may turn out to be quite fortunate. Against this background the government was wise to limit last Sunday’s “fiscal stimulus” to a modest affair, totaling only about Rs 30,000 crore, out of which two-thirds was for “additional plan expenditure”, which may not be fully spent this fiscal year. It may be far more important to actually spend the already budgeted plan expenditure effectively. If international oil and fertilizer prices stay at present levels, implying low or negligible subsidy rates (looking ahead) on price-controlled domestic sales, then there may be a case for a larger stimulus next year. Much will depend on the trajectory of revenues and other expenditures in a slowing economy.
IMF AND UNCTAD GROWTH PROJECTIONS
Annual percentage change |
| Month in 2008 when projections made |
IMF
|
UNCTAD
|
|
2006
|
2007
|
2008P
|
2009P
|
2008
Dec |
2009
Dec |
| April |
Nov |
April |
July |
Oct |
Nov |
| World Outputa |
5.1 |
5.0 |
3.7 |
3.7 |
3.8 |
3.9 |
3.0 |
2.2 |
3.7 |
2.3 |
| Advanced Economies |
3.3 |
2.6 |
1.3 |
1.4 |
1.3 |
1.4 |
0.5 |
-0.3 |
1.1 |
-0.5 |
|
United States
|
2.8 |
2.0 |
0.5 |
1.4 |
0.6 |
0.8 |
0.1 |
-0.7 |
1.2 |
-1.0 |
| Euro area |
2.8 |
2.6 |
1.4 |
1.2 |
1.2 |
1.2 |
0.2 |
-0.5 |
1.1 |
-0.7 |
| Japan |
2.4 |
2.1 |
1.4 |
0.5 |
1.5 |
1.5 |
0.5 |
-0.2 |
0.4 |
-0.3 |
| United Kingdom |
2.8 |
3.0 |
1.6 |
0.8 |
1.6 |
1.7 |
-0.1 |
-1.3 |
- |
- |
Emerging and
developing economies |
7.9 |
8.0 |
6.7 |
6.6 |
6.6 |
6.7 |
6.1 |
5.1 |
6.4b
|
4.7b
|
| Russia |
7.4 |
8.1 |
6.8 |
6.8 |
6.3 |
7.3 |
5.5 |
3.5 |
- |
- |
| China |
11.6 |
11.9 |
9.3 |
9.7 |
9.5 |
9.8 |
9.3 |
8.5 |
9.1 |
8.4 |
| India |
9.8 |
9.3 |
7.9 |
7.8 |
8.0 |
8.0 |
6.9 |
6.3 |
7.5 |
7 |
| Brazil |
3.8 |
5.4 |
4.8 |
5.2 |
3.7 |
4.0 |
3.5 |
3 |
5.1 |
2.9 |
World growth based on
market exchange rates |
3.9 |
3.7 |
2.6 |
2.6 |
2.6 |
2.7 |
1.9 |
1.1 |
2.5 |
1.0 |
World trade volume
(goods and services) |
9.4 |
7.2 |
5.6 |
4.6 |
5.8 |
6.0 |
4.1 |
2.1 |
4.4 |
2.1 |
a.At purchasing power parity (PPP) weights b. Includes “Economies in transition” and “Developing economies”
Sources: www.imf.org and www.unctad.org |
While such unprecedented monetary loosening and massive supplementary expenditures will definitely help, they will not fully neutralize the negative impact of the severe global financial and economic crisis on India’s exports, investment and consumption. With over 60 percent of global GDP having toppled into recession, a significant deceleration of India’s economic growth is simply unavoidable. After all, we share the same planet as America, Europe and Japan (and a rapidly slowing China). In this context a 6 percent economic growth in 2009/10 will be pretty good…if we achieve it.
The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views expressed are personal
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