Govindraj Ethiraj: Call the psychologists

India and China won't be Pied Pipering the developed world out of misery

The proverbial penny dropped sometime last week. It happened whilst moderating a panel discussion organised by industry body CII’s Pune chapter on how companies are managing through this slowdown.

Before I get to what transpired, it must come as no surprise to you that every discussion in every conference — regardless of the subject or theme, from information technology to accounting and global warming to distance education — eventually leads to talk on how bad things are.

Not to say it’s not but it’s getting a little infectious. Even those for whom matters are actually all right now tend to sympathise with the affected and nod quietly in approval. The guys who are doing really well, despite everything, carefully say, “We have been lucky so far,” obviously with a glum face because they don’t want to appear happy and find a bear at their office door the next day. So it’s the right season for prolonged institutional and, for that matter, individual despondency.

With the initial shock and awe period coming to an end, everyone is asking: When will all this despondency come to an end or is there more? The problem is I am asked the same question. That in itself is a very bad sign. When a journo is posed such searching queries, it means that the answer is truly out of bounds.

The Pune discussion, like many others, began with most of the CEOs present describing how their companies were “pruning the garden” at one end and then looking at fundamentally new ways to do the business.

Equally they spoke of the possibility of using the crisis as an opportunity either to expand business footprint or acquire, as the case may be, new technologies and capabilities.

The question then was: Could companies invest ahead in times like this, you know, be smart when every one else was running scared? The answer was, of course, this was the best time. But, as Anand Deshpande of Persistent Systems, a mid-sized technology outsourcing company, said, “We all know what to do but the question is when do we cut the cheque?”

That’s the kind of question which opens up fresh dimensions to which I have little to contribute but to aggregate a few more views that I have picked up in recent days. Suffice to say that it might help focus one’s energies on what could potentially bring us out of the recession or slowdown — choose any phrase you like, it makes little difference on the ground — rather than when.

And the penny dropping, yes. It’s now amply clear to all (I guess) that the US, Europe and Japan must turn for the rest of the world to look up. Economists such as Swaminathan A Aiyar have posed (even before the slump) the “rising tide lifts all boats” theory. Many acknowledged Aiyar’s point but the mood and Sensex were swinging on the other side. So came theories to support the phenomenon, such as the now-ridiculous decoupling theory, based, I would imagine, on a few contrarian stock market swings.

The optimists now argue that it’s India and China that will deliver us out of the crisis. How so when it’s getting worse even here is a question I have been posing to which the answers are not clear.

Former Aditya Birla Group Director of Financial Services, S K Mitra, for instance, had this to ask (at another discussion): “As I understand it, the combined GDP of the US, Western Europe and Japan is over $35 trillion. On the other hand, India and China’s combined GDP is perhaps $4 trillion, give or take. If that is indeed the case, how can India and China pull the other $35 trillion out of recession?”

Okay, forget the rest of the world, can we save ourselves? This is where it gets a little fuzzy. Optimists point to sectors like telecom and fast moving consumer goods and say growth is still strong here, at least relative to, say, automobiles. But what about domestic demand?

I caught up with Mastercard Asia Pacific economic advisor Yuwa Hedrick-Wong last week. He has been studying post-crisis China closely. His view is that China’s households are not in a position to boost domestic demand. For that to happen, their wages need to grow faster, a challenge when rural under-employment is widespread and a million-plus migrant workers are looking for jobs in urban areas. The Chinese stimulus package might help though.

He also concludes in a recent study that the number of households engaged in precautionary savings (58.5 per cent) is lower than in Asia Pacific (65.5 per cent). Which means that the Chinese are more likely to save either in order to buy property etc as opposed to saving in preparation for retirement. Or, that they have been willing to spend as much as their income allows.

In contrast, Hedrick-Wong says, it’s the Chinese businesses that are saving — almost 32 per cent of GDP in 2007 — taking aggregate savings to 52 per cent of GDP in 2007. He says this is partly due to their state sector dominance in the past. So, he says, businesses need to spend, not consumers (current savings at 18 per cent of GDP). It would be interesting to draw the same parallel in India.

Be that as it may, predicting when the economy will turn will still occupy our minds. It’s fairly clear that we should stop dreaming about India and China Pied Pipering the developed world out of misery. Economist Ajit Ranade of the Aditya Birla Group, whose pet theory on the meltdown is that this is the first financial crisis in decades to be entirely “Made In The USA” and exported to the rest of the world, says at most gatherings that you need to invite a psychologist to speak on when the downturn will end. Not an economist like him.