The New Year has brought little cheer for the economies of almost each and every country across the globe. The Government of India never fails to remind us that this is one of the few nations on the planet, certainly the only large country, which continues to witness reasonably robust rates of growth of gross domestic product (GDP). No man is an island. And we would be deluding ourselves if we believe that the Indian economy would remain insulated from what is happening all around us.
Merchandise exports from India are expected to fall by around a seventh (13-14 per cent) in the current financial year that will end on March 31, 2016, to touch the lowest level in four years. The biggest fall has been in the exports of petroleum products (largely by Reliance Industries, the country’s biggest privately owned corporate entity) by more than 50 per cent. Minister of state for commerce Nirmala Sitharaman has pointed out that the contribution of exports to India’s GDP came down from over a quarter in 2013-14 to just over a fifth in the first half of the current fiscal year. The labour-intensive, export-oriented sector — including textiles, garments, diamond polishing, leather, handicrafts and marine foods — is in deep doldrums despite the rupee weakening against the US dollar (which is supposed to make this country’s exports more competitive).
The World Bank may describe India and South Asia as a “bright spot” in the world economy. But we have little reason to rejoice. The country’s banks, especially public sector financial institutions, are groaning under the weight of non-performing assets, a euphemism for unpaid loans taken mainly by large private companies. Investments by the private corporate sector, instead of going up under a right-wing regime, have shrunk as large capacities have remained unutilised and profits squeezed.
One estimate has it that investments as a share of India’s GDP have come down by as much as 10 per cent in the last seven years, from 38 per cent in 2008 to 28 per cent at present. Despite the government’s best efforts to attract foreign direct investments, such investments comprise only a 10th of total investments. The government has no choice but to depend on the public sector to revive the economy. But demand at home is sluggish. The famed efficiency of railway minister Suresh Prabhu has not helped meet this year’s targets of freight traffic. Growth of electricity production has been tardy as has been the pace at which infrastructure projects are being implemented.
The only positive development is the sharp fall in world prices of crude oil, something for which the Narendra Modi government can surely take no credit. However, the fact that international oil prices are at their lowest in the last 12 years is symptomatic of the recession sweeping across large parts of the globe. What is worse is that the geo-political situation shows few signs of changing for the better. On the contrary, new conflicts in West Asia, notably the one between Saudi Arabia and Iran, portend troubled times.
The combine of “emerging economies”, Brics (Brazil, Russia, India, China and South Africa), has become a bit of a misnomer with the first two countries in a deep recessionary tailspin. Over the recent past, Brazil’s economy has shrunk by a quarter while that of Russia has become smaller by 40 per cent. The economies of other oil exporting countries like Nigeria and Venezuela have been ravaged. An October 2015 report by Brookings Institution and Financial Times warned that emerging economies risk “leading the world economy into a slump” and presciently anticipated the recent bloodbath in stock markets following the devaluation in China’s currency.
The largest economy of the world in terms of purchasing power parity, namely that of China, has today become the biggest source of instability for international financial markets. After having grown at double digits for three decades, its economy is currently growing at six-seven per cent. In 2008 and 2009, the growing economies of China, India and Australia had successfully managed to stabilise the global economy during the Great Recession; these countries can no longer be expected to play a similar role today.
Hungary-born American super-investor George Soros has already predicted an impending recession of the kind that was triggered on September 15, 2008 — the day Lehman Brothers, Merrill Lynch and American International Group simultaneously collapsed on New York’s Wall Street. Even if some contend that he is being unduly alarmist, it is nevertheless worth recalling what took place seven years ago.In a discussion paper released in March 2009, entitled “Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth?”, the Asian Development Bank stated that during 2008 the newly industrialised countries of Asia had lost wealth aggregating $9.6 trillion, which was 106 per cent more than the gross national incomes of countries in this region.
The problems thrown up by the worst recession the world witnessed since the Great Depression of the 1930s are not going to disappear in a hurry. The economic turmoil in China is expected to continue right through 2016, perhaps longer. As the governor of the Reserve Bank of India, Raghuram Rajan, has pointed out on more than one occasion, competitive devaluation will lead to greater protectionism as more governments across the world pursue what are described as “beggar thy neighbour” policies.
Such policies are of the kind through which one country attempts to remedy its own problems by means that tend to worsen the economic problems of others. The interest rate hike by the US Federal Reserve and the depreciation in the international value of the yuan are two such examples. Many believe Beijing will continue to draw down its dollar reserves to fuel liquidity and stimulate domestic demand as China’s economic growth rate slows down. A depressed world economy surely cannot be good news as far as India is concerned. Happy New Year!