Surjit S Bhalla: Crisis response - Good, bad or ugly?

On India's policy response to financial crisis

All the evidence suggests that India's policy response to the financial crisis is some considerable distance towards ugly.

There is a rumour going around (actually several related rumours), about the Indian economy. The most important rumour pertains to GDP growth in India: in particular, that because of some nimble and astute policies followed by the monetary authorities, GDP growth in India has suffered manifestly less than other countries, and perhaps even the least. As evidence, look at the year-on-year GDP growth recorded for Oct-Dec 2008 — 5.3 per cent. Not bad when most of the world has the same number but with a negative sign!

In my previous article (Business Standard, March 3, 2009, “Back to the ‘Hindu’ Rate of Growth”) I had offered some evidence to suggest that the rosy picture about the present GDP growth may be incorrect. Towards this end, I supplied evidence showing that seasonally adjusted annualised (SAN) numbers are the more valid and globally accepted numbers in calculating GDP growth, but the response has been one of dismissal, at best. How do I get the SAN numbers? Don’t the seasonally adjustment factors fluctuate wildly from quarter to quarter? (They don’t.) Don’t the seasonal adjustment factors depend on the technique of estimation rather than the underlying reality? (No.)

Okay, let us believe the counter-factual and accept that monetary policy has been successful. What is known about this policy is that it has been unduly strict, and tight, and mean. This is why the inflation rate has been brought down from 13 per cent to zero. But then, if nobody denies that the policy has been strict, then why has the growth rate not suffered? Of course it has, counter the apologists, but because of our fine tuning it isn’t down to less than 5.3 per cent. But wait a minute — isn’t it the case that the whole world, and I mean the whole world, has inflation down to zero, if not negative, levels? And interest rates also down to near zero levels? If so, what was special about Indian policy? Good, so you agree that our monetary policy had precious little to do with the “success” in reducing inflation (whether measured by the GDP deflator or the WPI; see below on the CPI) to zero.
 

HOW WELL HAVE COUNTRIES COPED WITH THE GREAT FINANCIAL CRISIS?
Country	GDP Growth 2007 Q4 (in %)	GDP Growth 2008 Q4 (in %)	Difference (in %)	Country	GDP Growth 2007 Q4 (in %)	GDP Growth 2008 Q4 (in %)	Difference (in %)
Australia	3.8	-2.1	-5.9	Hungary	2.0	-4.0	-6.0
Austria	2.8	-0.8	-3.6	India	8.2	-3.6	-11.8
Belgium	1.6	-5.2	-6.8	Iceland	-3.8	-3.7	0.1
Canada	0.8	-3.4	-4.2	Israel	6.6	-0.5	-7.0
Switzerland	4.4	-1.2	-5.6	Italy	-1.1	-7.2	-6.1
Germany	1.4	-8.4	-9.8	Japan	4.4	-13.4	-17.8
Denmark	0.5	-8.0	-8.6	Korea	6.2	-22.6	-28.8
European Monetary Union	1.6	-5.9	-7.5	Mexico	2.5	-10.8	-13.3
Spain	2.5	-3.9	-6.4	Netherlands	6.2	-3.4	-9.6
European Union	2.2	-5.9	-8.2	Norway	5.7	5.4	-0.3
Finland	6.0	-5.1	-11.1	Poland	8.3	1.4	-6.9
France	1.6	-4.7	-6.4	Portugal	2.3	-8.0	-10.3
G7	1.0	-7.4	-8.4	Slovak Republic	27.9	8.5	-19.4
United Kingdom	2.2	-6.1	-8.3	Sweden	5.9	-9.7	-15.6
Greece	2.5	1.2	-1.3	USA	-0.2	-6.4	-6.2
Notes: The GDP growth figures are for the quarter indicated over the preceding quarter; all figures have been seasonally adjusted and annuali