Nath's optimism at Davos just wishful thinking

At the annual World Economic Forum (WEF) meet at Davos, Commerce Minister, Kamal Nath expressed optimism that India will grow at 7-8 per cent during the current financial year and that India’s recovery will be faster than the rest of the world. He was also upbeat about the growth prospects during next year at about the same 7-8 per cent. His optimism will be received with a bit of scepticism given the background of similar confidence expressed a year back at the WEF meet by the then finance minister, P Chidambaram.

During the panel discussions on ‘Global Economic Outlook 2008’, Dominique Strauss-Kahn, managing director, International Monetary Fund, told participants that low interest rates, high liquidity, a breakdown in credit and risk management practices, and a shortcoming in US financial regulation and supervision had produced an economic “perfect storm” in the financial world. Lawrence H Summers, Charles W Eliot University Professor, Harvard University, USA, termed it a “mildly historic” event that the IMF’s managing director had, for the first time, called for increasing the budget deficits and fiscal stimulus, rather than making the usual plea for fiscal consolidation.

But, Chidambaram dismissed the warnings and said (in the same panel discussion) that his country has not been affected by the slowdown. India’s economy is driven by investment, consumption and exports, he explained, and has been undergoing an investment boom fuelled by savings that add up to 35 per cent of GDP. Chidambaram said that he expects only minor secondary effects from the slowdown. “My view is that India’s economy will continue to grow at a robust rate”, he said.

At the India Economic Forum in November 2008, Chidambaram was more sober. “The service sector, driven by millions of small and medium enterprises, is facing some liquidity problems, but most affected are the large manufacturing industries and the financial sector. The crisis will affect India’s exports — they might not reach the $ 200 billion target,” he said.

It is now quite clear that Chidambaram had not fully anticipated the complete impact of the meltdown in the global financial markets. As he will readily agree, the effects of the financial crisis in India are far more than secondary minor effects. So, Nath’s similar optimism, despite gloomy forecasts from IMF, is likely to be seen as similar bravado. At the WEF, his confidence sounded more like wishful thinking, rather than reasonable appraisal of the reality. Most other speakers were quite gloomy about the near term.

Nath also talked about identifying possible ways for reactivating the multilateral trade negotiations of the Doha Round of the World Trade Organisation, the role of G-20 in shaping the new global financial architecture, reform of global institutions with greater say for developing countries, injecting liquidity, recapitalising banks etc. Protectionist tendencies must be avoided, he said.

“At this critical juncture in the global economic history we must guard against protectionism. History is witness that whenever countries try to prop up protectionism, it intensifies depression”, said Kamal Nath. He should have also cautioned against increase in direct/indirect export subsidies that turn into winner one who gets more subsidies than the one who is more efficient.

tncr@sify.com