T N Ninan: The end of fear

Is it correct to say that the time to abolish fear has come as the worst of the downturn is over?

The only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance.” Those were the words with which FDR began his inaugural address to his fellow Americans during the depths of the Great Depression, in early 1933. More recently, that is three or four weeks ago, Financial Times came up with a new catchphrase: pessimism porn—which must be a way of saying with emphasis that the pessimism is overdone and now borders on voyeurism. So, would it be correct to echo FDR and declare that the time has come to abolish fear—because we have seen the worst of the downturn?

Some optimism might seem warranted when the stock market has dramatically recouped its losses of the past five months, and in the wake of the G-20 announcements of Thursday evening, which would have given confidence to many that governments are doing the right things. Also, observers have spotted the “green shoots” of recovery in the renewed growth of bank credit, the continued buoyancy in rural demand, and the improved sales figures reported by the producers of automobiles, cement and steel; cement prices have actually been raised. Internationally, the US housing market is showing signs of life after death, while a couple of global banks have reported that they are making money again. For good measure, the governor of the People’s Bank of China has declared that “Leading indicators are pointing to recovery of economic growth”.

One should be wary of turning an optimist because share prices have recovered. After all, just three weeks ago some analysts on television were talking of the possibility of the Sensex dropping to 6,000! More importantly, the domestic macro-numbers still look bleak—flat industrial production, sharply falling exports, rapidly growing credit card delinquency and easy conditions in the money market do not spell stabilisation. The troubled sectors are still troubled—retail, real estate, all export sectors (including textiles), investment activity. The big builders are finally caving in and dropping prices, and retailers are shutting stores or re-negotiating rents. The crash in non-oil imports in February suggests that the industrial downturn still has some distance to go. Even telecom is said to be slowing down. Over and above everything else, the prospects of a cohesive and effective government after the elections appear dim. It will take a brave man looking at these trends to suggest that people should stop worrying.

Still, there is enough anecdotal evidence to suggest that the crisis phase of October-January may be over; and the business mood surveys report a minor uptick, at low levels. The problem is that, between abandoning fear and entertaining hope lies a leap of faith, and the evidence is still far too mixed to warrant something as positive as hope. All one can look for is a halt to the deterioration in the business environment, and a levelling off (the ‘L’ shape argument on economic momentum), as opposed to a ‘V’ shape, which means a quick bounce back, or even a ‘U’ position. Leading international institutions have placed India’s GDP growth in the new financial year at well below 5 per cent—which suggests no recovery till March 2010. Exports will be flat next year, the commerce secretary says—and he must be an optimist, since recent months have seen such massive declines. The best that seems to be hoped for by most companies is that the recovery visible in some sectors will be mirrored in a few more, and that the overall situation will not get worse. It could boil down, in the end, to a matter of psychology.