Current Economy Slow Down

“If you are capable of enjoying positive situations you must make yourself equally bold for just opposite direction.”

Someone said ……………………………. Sometime

If leader is on smooth road followers may get some zephyr ,but when he dwindles followers are bound to get some shocks. That’s what really happened as far as present economic conditions around the globe are concerned. Present economy slowdown as we all know started in U.S. last year in October & initially it was concentrated on U.S. economy only but as expected & as experts forecasted that it is going to affect whole world & it did. So now let`s examine some facts & figure related

GOOD TIMES IN THE US… The US Economy has seen an unprecedented growth over the last decade, which accelerated to over 4% per year over the last four years. The year 2000 saw this growth at an all-time high of 5.1% - a figure that is staggering in enormity when one considers that a 1% growth in the US economy is comparable to an 8% growth in the Chinese Economy. Further, 33% of the global growth is linked either directly or indirectly to the US economy. With this in mind, it was a common belief that the American honeymoon would never end. It was the Industrial Revolution all over again - with increasing productivity levels, happy days were here to stay. CLOAK STARK REALITIES… This growth however, had - and continues to have - a flip side - serious imbalances are present in the US economy, indicated by the following factors. A huge current account deficit at US $500billion - over 5% of the GDP. So far, the current account imbalance, which has been quite high over the last 4-5 years, has mainly been sustained by capital inflows from Euroland to the US. European investors had great confidence in the ability of American companies to earn greater profits in the future by way of increases in productivity allegedly taking place in the US Economy. How much of this perceived productivity increase is true of all or most of corporate America and not just IT firms is, however, debatable; extremely high Private Sector borrowing; gross over-valuation of the asset market and· the fact that the American consumer, leveraging on notional wealth, is borrowing more and more, to spend, resulting in a national dis-saving. Consumption expenditure far outstrips disposable income. It has been argued that domestic consumption was buoyant on the basis of strong equity markets and although some of these have also been corrected more recently, the risks are a currency collapse or something going wrong in the equity market, thus rendering the whole system vulnerable.

Of disturbing significance is the fact that each of the above mentioned factors of imbalance has preceded other recessions of the past. In fact, the situation today is a close replication of 1998. Then, the Federal Reserve reduced the interest rates by 75 basis points, thereby reviving the markets. With dot coms and software successes waiting to happen, a huge boom took place and consumption spending came back with a bang. 1998 was a classic example of the 'markets driving the economy' syndrome, which continues to be the norm.

What remains to be seen is whether the gamble will pay off this time around. LANDING IT WILL BE - HARD OR SOFT IS THE QUESTION… If yes, the soft landing will be brilliant for global markets and for global economies. On the other hand, however, if Alan Greenspan, Chairman, Federal Reserve, is not able to revive the market with interest rate cuts, the current account deficit will further increase, leading to investors shying off potentially "risky" US assets. All of this can only result in much larger dis-equilibrium - and subsequently, a much larger recession, therefore, than what we are seeing today. It is, however, too early to predict the final outcome. The current probability of a soft vs a hard landing is 2:1. One can also take heart in the fact that a global recession, which would be the result of a hard landing of the US Economy, has not happened in the last 50 years - not even during the 1973 oil crisis. The most likely possibility, therefore, is a growth recession or reduction. THE AFTER-EFFECTS WOULD BE MANIFOLD… With over 33% of global growth linked either directly or indirectly to the US economy, there is a disproportionate global dependence on the US Economy. Turmoil in the US, in turn, therefore, causes a substantial ripple effect on a number of global economies.

so now after having a closer look on U.S. economy we examine we examine its effects on other parts of globe. ASIA Japan would be the worst hit, so to say. Before the Euro, everything moved in linear correlation to the US Dollar. If the US Dollar strengthened, the deutsche Mark weakened, as did the yen. This time, however, a fundamental change was witnessed - the Euro strengthened and the Yen weakened. The Yen, which has come down by 12% in the last 4 months, seems to be the only currency taking a beating despite the slowdown in the US economy. The Japanese have tried everything in the book to revive and stimulate the economy to its previous glory but to no avail. The Nikkei, which used to be 40,000 at one time, is about 13,000-15,000 now. Further, retail sales in Japan have been coming down for a straight 44 months. Japanese exporters talking down their currency has not helped. The biggest irony is that corporate Japan is doing well but this has not reflected anywhere in stock market prices, which are once again down to levels where a number of banks are facing capital inadequacy problems. If exports to the US decline as a result of the slowdown and Japan continues with a weak Yen policy, it will result in some more and graver imbalances. All banks have huge equity portfolios and anytime the market goes up a little, they start dumping these and the market comes down. The worrisome factor is that the banks are now all unsure about investing money in Japan.

On the other hand, Japanese corporates have huge holdings in the west, but prefer to leave most of their earnings in US Dollars and the Euro. Toyota, for example, has just decided to do so with US$ 26 billion of their earnings. The logic really is that since most Japanese companies remit their profits to Japan in March, they would end up remitting more Yen in the current scenario. If more and more companies begin to do this, the Yen would weaken even more.Other Asian economies, like Malaysia, Taiwan (where chip manufacturing companies are already running lower at 85% capacity), Hong Kong and Singapore would feel the ripple effect far more than others. In other parts of the world, Canada, Mexico and Brazil are most certainly way more vulnerable than any other countries.

EUROLAND Sunnier days are ahead as far as the Euro is concerned as all factors determining the Euro - interest differentials, oil prices and relative productivities are favourable to the currency. A 10-year Euro bond today yields about 4.65% as compared to 5.15% by a 10-year US Treasury bond. This spread is going to narrow down a bit further with further expected cuts.

The falling oil prices, lower-than-expected productivity levels of American companies and the fact that oil producing and oil revenue earning countries have invested in US dollar denominated assets traditionally and will continue to do so, are all factors that are Euro positive. According to the experts a base will be formed around the Euro at 92-93, where it will see a brief honeymoon. It is, however, too early to predict where it will go thereafter. What remains clear, however, is that if the US economy does not revive, more money will flow into Euroland or else, the Euro will continue to gravitate around these levels.

so these are the after effects of U.S. slowdown on Asia & Europe the other two most important parts of the world now we can shift our attention to our own country the India. INDIA It is far too presumptuous to think that India is going to be hugely and adversely affected by the US economy slowdown. At 0.6%, India's share of the global trade is too tiny for this. At the same time, however, one must always bear in mind the far-reaching impact of globalisation, which has, in turn, led to the interdependence of economies, particularly where the US is concerned. 25% of India's IT exports, for example, are to the US. The value of the Rupee, however, as far as interest rates are concerned, would depend on fund flow and valuation dynamics and the Reserve Bank of India's policy towards this. In the end count, the Rupee still moves the way the Central Bank wants it to - we are still a closed economy to that extent. And the RBI tracks currencies other than the US Dollar - the Euro, Yen, RMB, as also a few other competitor currencies, whilst deciding the fate of the Rupee.

The Rupee is today fair-valued at the INR 46-50 to 1 US$ level, but the RBI, conventionally, is loathe to see it appreciate, as it would cause a lot of imbalances that could be difficult to control. Further, depreciation of the Rupee can only aid exports, and given the strong Indian export lobby that demands exchange rate management, the RBI would be politically correct in doing so.The second factor that the RBI takes into consideration whilst managing the Rupee is event risk. Events such as nuclear tests, securities scams etc affect markets in India far more than in a lot of other economies. The RBI would like to always be prepared for this and bears a given, prevailing situation in this light as well, before taking any decision.

The wild cards, in this entire play of currency management is the weakness of the Yen and the RMB. Any significant weakening in either of these currencies could very well have a domino effect across the entire region, including India and the Indian currency, the Rupee. The RMB is closely linked to the US dollar - the latter's fortunes really determine what the RMB will do. The dollar weakening against the Euro and other currencies is a huge breather as far as Chinese exports are concerned. If, however, the dollar starts appreciating, then the Chinese will want to kickstart their economy through a possible RMB devaluation. It is critical to remember, therefore, that despite the over Rs 3,000 crore of investments that came into the Indian market in the first 20 days of January, 2001, (partly, some feel, because of a certain perceived under-valuation of the Indian markets and the not so high 'risk', and partly because interest rates have been cut in the US), there is always a possibility of something going wrong externally that could affect the Rupee. In the end count: A decrease in exports as a result of the US Economy slowdown will be certainly negative from the Indian standpoint but

the decrease in oil prices (from a peak of $35 a barrel to $20-$22) will be positive for the Indian Rupee and the funds flow, given the US interest rate cuts, would be positive. However, the FDI track record will continue to be shoddy, so the effect would be neutral. The amazing growth of frontline IT companies at 55-60% is a thing of the past. The global slowdown will definitely affect these companies. What inevitably needs to change is to shift our exports focus from being US-centric to newer markets. The Reserve Bank, however, is far more concerned with the slowdown in growth rather than inflation, which will be counter-balanced by the lower oil import bill. Its focus will, therefore, be on re-igniting the 'feel-good' factor in order to stimulate consumer spending patterns as a function of their aggregate net worth rather than disposable income. Measures to this effect must be set in motion at the earliest, as 2001 is the only year when any fundamental policy changes can be made. 2002 will be too close to the general elections. IN THE FINAL ANALYSIS… WHAT WILL THE RBI DO?

The RBI's passion for gentle depreciation of the Rupee will continue. The trend is going to be a Rupee depreciation of approximately 5% every year. As opposed to last year's depreciation by 7%, this year, the Rupee will depreciate by around 3.5%, partially because of the higher depreciation in the year 2000 and also because a lot of positive factors will come into play this year. All the money currently flowing into India is for equity markets. However, with a stable and gently depreciating Rupee more money will flow into the fixed income market, particularly as US interest rates come down - a positive in terms of the downward move of yield curves. OVERSEAS FUND FLOWS WILL BE BUOYANT There is a huge correlation as far equity markets and fund flows from overseas are concerned. The start of year has saw an inflow of Rs 3000 crore, which is more than half of the total FII flows received the whole of last year. This seems likely to continue, as India is looking attractive both from the P/E and diversification point of view - the P/E is 13 on current earnings and 11 on future earnings. In this regard, the year 2001 will replicate 1999 in terms of fund flows rather then 2000, which was coping with utterly overstretched valuations. The sell-offs of 2000, while making all of us more realistic with regard to investment in the US equity market, will certainly bring in more money from overseas. THE GLOBAL VILLAGE SCENARIO WILL GET STARKER Indicative fund flows into India, whilst being important, are not as critical as interest rate cuts in the US. Given the same, it becomes more attractive to look at emerging markets overseas- more and more money is hence, expected to flow into India. We must not, however, under any event, become presumptuous enough to compare ourselves to China. Even a small country like Chile gets three times more foreign investment than India, a factor that is far more worrisome than constant comparisons with China, which is a different ball game altogether. OIL PRICE MOVEMENTS WILL BE POSITIVE TO RUPEE STABILITY The OPEC honeymoon appears to be over. Lower oil prices will be contribute positively to Rupee stability and counter export sluggishness.

INDIA'S PRIVATISATION EXERCISE MUST GALVANISE Markets are bored of hearing clever statements on privatisation. The disinvestments of Air India, IPCL and Maruti Udyog are going to watched very closely over the next few months, particularly by overseas investors. Successes in the financial industry have proven that it can be done and a few quick and conspicuous decisions are imperative to improve investor and market sentiment.

So we examined a lot about impact of U.S. slowdown on Indian economy so now we examine why U.S. slowdown is affecting us with reasons: Firstly the United States is India's largest trade partner, source of foreign direct investment and external job opportunities for the Indian middle class. Any slowing of the US economy is likely to hurt India more today than at any time in the past. The fact is that the US is not only India's largest trade partner, but that India has the highest trade surplus with the US and any slowdown in Indian exports to the US is likely to have a larger impact on the trade deficit than a slowdown in trade with European Union or developing Asia. India's trade with the EU and non-Opec developing Asia, our other two major trade partners, is more or less balanced with exports to these markets equal to imports from them. Our huge trade deficit with Opec countries is largely balanced by the trade surplus we enjoy with the United States. Recently published data shows that India's trade surplus with the US has actually increased since India's exports to the US have continued to grow, while its imports from the US have declined. Indian exports to the US have been mainly in the area of consumer durables and these have grown, with the recent growth of the US economy. Thus, while in the first quarter of 2000-01, Indian exports to the US went up by 26 per cent, imports from it were down by 18 per cent. This trade data does not include software exports. The software segment is another main area of concern. The US has emerged as the biggest market for Indian software exports. A slowdown of the US economy will hurt the "new economy" in India since it is still largely export-dependent and has not yet found a domestic market large enough to offset any loss in the external market. But analysts and software CEOs argue that in a slowing economy, jobs are cut and companies invest in automation, so that the demand for software services and for IT products is likely to increase as the economy slows down. Also, many US firms may offload work to lower-cost countries like India, especially in the area of data-processing and office management work, and that this is likely to increase the demand for new economy services in India rather than hurt them. On the negative side is the concern that firms tend to put on hold expansion plans and investment in new projects when there is a fear of a generalised slow down. This is likely to hurt demand for Indian IT services and products. The final outcome may be a combination of both factors. But one must realise that most of the companies who service the lower rung areas of maintenance etc., will not really stand to loose. They may face a squeeze on their margins but the business will continue.

Another area which will be impacted, will be the capital markets. Today the world markets dance to NASDAQ’s tune. Dr Huang, who has spend 20 years in US and Taiwan, China, to develop and implement a method to track accurately daily financial markets, said at an investment forum early last year that NASDAQ was overheated, would face a correction upto 2800-3000 and the Dow, he stated, would be back to 9600. and global markets would follow US for 20 % correction. His logic was that there is never a bull market before economic softlanding. The bulls must take 20 % or more correction and consolidation reflecting economic slowdown impact on consumer demand and corporate earning decline. Bull markets, according to him, exist under expanding monetary policy. Expectations of higher profits resulted in an unbelievable rally in the equity markets over the last five years. NASDAQ, the technology stock heavy index, rallied from the start of 1995 and increased by a whooping 5.8 times till March last year. Capital market rally resulted in the `wealth effect', which further fueled the economy. Americans saw their investments in equity markets growing dramatically in value. However with this wealth effect wearing off and the risk consciousness rising, we will see a lower deployment of funds to the world equity markets, which are also in a slump at the moment. For the Indian markets, the impact is two fold - firstly, lower funds coming into the market through the FII route and secondly, companies

who had planned NASDAQ listings etc. have had to put their plans on hold and this will delay their funds inflow as well as growth plans. So, we in India, will definitely need to be prepared for some fall out on the slowdown in the US economy and fine tune our corporate and export strategies as the picture develops. So here comes the real picture lets now move our focus to reports published by IMF about this situation

Last year when the International Monetary Fund issued its half-yearly report, the world, in the words of one its leading officials, appeared to be a much “safer place.” Growth was continuing in the United States, the European economy was expanding, East Asia was recovering from the crisis of 1997-98 and there were even signs that a Japanese “recovery” might finally get under way. The picture presented in the latest World Economic Outlook released on Thursday is very different. Apart from cutting the world growth forecast by 1 percentage point, the main feature of the report is the uncertainty over the future course of the global economy and the warnings that, notwithstanding the hopes that the situation could quickly turn around, it could also worsen quite rapidly. In his press conference releasing the report, IMF director of research Michael Mussa pointed out that last September in Prague world growth for 2001 was predicted to be 4.2 percent. This has been revised down to 3.2 percent. It is clear, he said, that “global growth is slowing more than was anticipated, or is desirable.” “For the United States, which has been the mainstay of global expansion in the past decade, growth this year is forecast to be only 1.5 percent, down from almost 5 percent last year and from an earlier forecast of over 3 percent for this year.” The projection for the year 2002 has been reduced to 2.5 percent, at least one percentage point below the estimated potential growth rate for the US economy. In the euro-zone, the IMF estimates the growth rate will be 2.4 percent, a full percentage below what it forecast last September. Mussa said the situation in Japan was “even more worrying” with growth for this year forecast to be barely over 0.5 percent and growth for next year expected to reach only 1.5 percent. Asia will be hit by the slowdown in North America and Japan and by the global downturn in telecommunications and high technology with estimates for growth coming in at between 1 and 3 percentage points less than six months ago. Mussa, however, did not confine his remarks to the details of the report but delivered a stinging rebuke to the European Central Bank and its refusal to cut interest rates, following rate cuts in the US and Japan. After noting that the euro area was not contributing sufficiently to world economic demand, Mussa continued: “In a period when general economic slowdown is the main problem and when inflation is not likely to be a continuing threat, the euro area, the second largest economic area in the world, needs to become part of the solution rather than part of the problem of slowing down world growth.”

Mussa took the opportunity to deliver another broadside when taking questions from journalists on the briefing. Asked to comment on whether calls on the ECB to cut interest rates by the managing director of the IMF and the US treasury secretary could be regarded as “interference” Mussa replied: “Here in the IMF we don't call that interference. We call it surveillance. And it is mandated by the Articles of Agreement.” Global recession In delivering its pronouncements, and particularly in setting out policy prescriptions for countries that are considered not to have measured up, the IMF strives to create the impression that it is fully in command of the situation, with a deep understanding of the processes taking place in the global economy. But it seems the impression is starting to wear a little thin—even among financial journalists who can usually be relied upon to echo its analysis without asking too many questions. As one journalist pointedly commented: “Mr Mussa, it seems that yourself and Wall Street and every economist has been caught by surprise by this slowdown. In the last WEO you said the prospects were the best in a decade. Now you say we'll avoid recession. Given the situation is so fluid, how can you be so certain that we won't actually dip into a US recession and possibly a global recession?” Mussa replied that there was “no certainty in this business” and offered the reassurance that policy in most countries, which had policy flexibility, had been adjusted “promptly and reasonably aggressively to the threat that things might be even somewhat worse than we have allowed for in the baseline.” The WEO report itself claims there is a “reasonable prospect that the slowdown will be short-lived” but warns that “the outlook remains subject to considerable uncertainty and a deeper and more prolonged downturn is clearly possible.” So far, it notes, the effects of the global slowdown have been most visible in countries which have close trade ties with the US, including Canada, Mexico, and East Asia. The outlook for the rest of the year “will depend on how deep and prolonged the slowdown in the United States proves to be”—an issue which “remains subject to considerable uncertainty.” The WEO says its baseline scenario is that the US economy will pick up in the second half of the year, growth will remain strong in Europe, while recovery in the Japanese economy will resume in 2002. But it adds that while this scenario is “plausible” it is far from “assured” and the “risks of a less favourable outcome are clearly significant.” One of those risks, it states, is that the “virtuous ‘new economy' circle of rising productivity, rising stock prices, increased access to funding, and rising technology investment that contributed to the strong growth in the 1990s could go into reverse.” Even this is a somewhat optimistic assessment, given that most observers of the US economy have concluded that, whatever the immediate outcome of the present downturn, overcapacity in all sections of industry—and above all in high-tech investment—means that there is no prospect of the boom of the latter 1990s returning. The report notes that if the slowdown does prove to be deeper and more prolonged than anticipated “this would pose several interlinked risks for the global outlook that would significantly increase the chance of a more synchronised and self-reinforcing downturn developing.”

Among those risks is the possibility that what the report calls “apparent misalignments among the major currencies” could “unwind in a disorderly fashion.” It points out that current account deficits of the size presently experienced by the US—more than $430 billion, equivalent to around 4.5 percent of gross domestic product—have not been sustained for long and that “adjustment is generally accompanied by a significant depreciation [of the currency].” If there were increased economic growth in Europe and Japan, then it would be possible to reduce the US imbalances in a “relatively manageable and nondisruptive fashion.” “However, in an environment where US growth slows sharply, the portfolio and investment flows that have been directly financing the US current account deficit could adjust more abruptly.” In other words, there could be a rapid movement of capital out of the US and a sharp fall in the value of the dollar. “This would heighten the risk of a more rapid and disorderly adjustment, possibly accompanied by financial market turbulence in both mature and emerging markets. Large swings in exchange rates could also limit the room for policy manoeuvre.” That is to say, according to the IMF's latest forecasts, there could arise a situation in which the US dollar starts to fall and financial markets are hit by a crisis, under conditions of a deepening slump. The fact that such a possibility is even being canvassed is a measure of how far and how fast the world economic situation has moved in the past six months. So here IMF also clearly specifies the picture of global slowdown. Lets move to the perception of IMF about Indian economy.

EVEN as the Indian economy is yet to get out of the ronounced slowdown and downturn in manufacturing activity, a new research dissertation by the International Monetary Fund (IMF) has posed the query as to whether India's rather strong economic performance could be sustained ``without fiscal policy adjustment.'' In its latest IMF Research Paper, an article by the Fund economist, Mr Tim Callen, contends that India has had an impressive economic performance over the past decade. Its growth rate has been among the highest in the world, inflation has been relatively well-contained and the balance of payments has been maintained at comfortable levels. This performance has been achieved despite the Asian financial crisis, the international sanctions that were imposed following the nuclear tests in 1998 and a series of adverse weather-related shocks and natural disasters. While poverty has declined over time, it remains at a high level, with more than one-quarter of the population living below the poverty line. Moreover, macro-economic imbalances, particularly on the fiscal side and slow progress in key structural policy areas appear to be dampening growth prospects, Mr Callen added. The IMF research paper on India has come at a significant juncture when the debate centres around how to

unleash growth impulses to get the recovery going rather than get stuck with any overly obsessive concern over fiscal consolidation through compression of expenditure and reduced public sector outlays. Against this backdrop, recent IMF research on India -- much of which is gleaned in a new tome, India at the Crossroads: Sustaining Growth and Reducing Poverty -- has focused on what policies are needed to sustain the rapid growth that is essential to reducing poverty. Providing an overview of the research, Mr Callen noted that India achieved considerable fiscal consolidation during the first half of the 1990s, but subsequent policy slippages, at both Central and State Government levels, resulted in the consolidated public sector deficit ``ballooning to over 11 per cent of GDP and public debt rising to 80 per cent of GDP by the end of the decade.'' IMF staff research has focused both on the reasons for the deterioration in the fiscal position and on the sustainability of current fiscal policies. A paper by the Fund economist, Mr Muhleisen (1998), assessed the revenue impact of tax reforms implemented by the Central Government during the 1990s. He found that, while elasticity estimates point to a small improvement in the revenue-generating capacity of the tax system, overall tax revenue declined relative to GDP due to the substantial cuts in tax rates. It is small wonder that Mr Muhleisen concluded that the disappointing revenue performance reflected the partial nature of the reforms. On the sustainability of fiscal policies, another economist, Mr Reynolds (2001), used a simple growth model to demonstrate that despite the high deficits incurred in recent years, India has been able to preclude a fiscal crisis largely because of the conducive differential between real interest rates and overall economic growth rates. However, Mr Reynold's simulations suggested that a continuation of recent fiscal policies would risk putting India on an explosive debt path. An alternative approach to assessing Indian fiscal policy was adopted by the economists, Messrs Cashin, Olekalns and Sahay (1998), who used an intertemporal model to demonstrate that policy has been consistent with tax-smoothing behaviour. They also found, however, a significant bias toward deficit financing -- which has led to excessive government borrowing, as well as resorting to seniorage and financial repression -- and Government debt was estimated to be in excess of levels considered optimal or consistent with intertemporal solvency. On India's external sector, Messrs Cerra and Saxena (2000) estimated the causes of the 1991 balance of payments crisis and since then India has maintained a sustainable external position and a number of papers have looked at the factors behind the success. Mr Towe (2001) assessed the factors that helped insulate India from the turmoil of the Asian financial flu, attributing the success to ``effective exchange rate management, generally sound macroeconomic fundamentals

and the presence of capital controls.'' The financial sector has also been a key focus of the reform agenda in recent years. Two papers by Fund economists, Messrs Mohanty (1998) and Ilyina (2001) explored issues pertaining to the mutual fund and nonbank financial company (NBFC) sectors respectively. Both sectors have faced recent difficulties that highlighted weaknesses in their regulatory milieu; the papers assessed the reforms that have been undertaken by the authorities to strengthen these sectors and made recommendations for further action. These include, among others, further beefing up financial sector regulation and supervision, reductions in problem loans, steps to increase competition among institutions and measures to reduce the role of government in the financial sector.

So we didn`t get a very good picture of Indian economy either. Now we are in the position to examine how economically how India varies with global trends.

THE latest reports of gloom in the global economy are significant for India. The global economy is an important determinant of India's growth prospects. Global GDP growth stalled in the quarter just ended - the weakest performance in the last decade. J. P. Morgan's highly respected report on World Financial Markets for the third quarter 2001 states that the world economy as a whole is suffering from low growth. The latest global numbers show a modest inflation outlook, reflecting below-trend global economic growth. Higher energy prices are fading as a source of industrial country inflation. There are also dramatic cuts in the prices of hi-tech equipment. Sustained low inflation will cause the continuance of lower interest rates and sustained easing of monetary policy. The report is, however, optimistic about a gradual return of trend growth in the US economy well in advance of other key economies. The dollar will continue to be strong. The prospect of recovery will be both sluggish and unevenly distributed among the major economies. Global economic growth in terms of GDP is expected to reach only 1.19 per cent during the year's second half. The report is, however, categorical that an outright global recession will be averted because most of the principal factors responsible for the reduced growth have been, or are being, reversed. The overall impact of the rising slowdown of global economy has been widespread and intense. Virtually all economies in the world are operating below their potential.

There will be two effects of this slowdown. One has been referred to as lower inflation and the other is higher unemployment. Already, commodity prices are falling markedly during the past few months, and further declines are expected. The global economic environment is becoming highly disinflationary and, in Japan, deflationary. This should encourage consumption and ultimately aid recovery. Crude prices will, hopefully, remain steady. The US consumer price index inflation is expected to fall to a rate of 2.4 per cent by end-2001. Both producer and consumer prices continue to decline in Japan, where consumer prices have fallen at a rate of 0.6 per cent (annual rate) and a similar decline is expected for the year as a whole. The decline in asset prices, in particular, the real estate prices, has generated new gaps in the adequacy of collateral for bank debts. The decline in growth of the global economy has been caused by a combination of global and country-specific factors. One universal cause has been the persistent rise in the energy prices during 1999-2000. Another key factor to the reduction in growth has been the sharp and sudden downturn in hi-tech investment in the second half of 2000. This weakened growth, notably in the US and Europe, while brutally reducing the export performance of many Asian countries. This pervasive setback has contributed to the weakness of manufacturing sector in virtually every industrial country and driven many Asian economies, including Singapore, into recession. Particular mention must be made of the rise and fall of demand for hi-tech equipment. In the US, the output of hi-tech equipment accelerated at an annual growth rate to 70 per cent in early 2000, before collapsing. The crisis worsened because not only was demand falling but the unit price equipment in the hi- tech sector also collapsed. US investment spending was sharply reduced, particularly on hi-tech equipment. The unexpected decline in the demand for hi-tech investment goods undermined stock prices, reversing the earlier surge in the value of new economy stocks. One other factor responsible for straining the earlier growth and subsequent slowdown in the US has been the tightening of monetary policy. While the tightened monetary policy did help control inflation, it also contributed to subsequent economic slowdown. Similar was the experience in other countries, where major central banks contributed to the cycle, by first tightening their monetary policy and then relaxing it. The opinion of most observers is that the recent problems of the emerging economies, such as Brazil, Argentina and Turkey, will not have a contagion effect and will not spread to other economies, unlike the experience of 1997-98 East Asian crisis. It is worth noting that while global growth has slipped below 2 per cent in 2001, the Indian economy has been well above the global rate. The Indian economy has continued to grow at a rate ranging 5-6 per cent with a credible inflation record and with no perceptible strain on the Balance of Payments. The J. P. Morgan report is significant for certain comparisons it offers between India and China. Chinese GDP grew 7.5 per cent, against India's 5.3 per cent. The consumer inflation of China in 2001 was 1.6 per cent, against India's 5 per cent. One important contributing factor to this is the low fiscal deficit in China at 2.7 per cent of GDP as against nearly 7 per cent in India. The trade balance was in surplus of $27.7 billion in China as against a negative figure of $9.1 billion for India. The current account balance is also significantly more robust in the Chinese case, standing at a surplus of $15.4 billion against a negative figure of $1.6 billion for India. The international reserves of China stood at $178.9 billion, against our $43.8 billion. The total external debt of China, as a

percentage of exports, stood at 50 per cent, against 139 per cent in the case of India. India's major benchmark in global development has to be China. One important aspect of J. P. Morgan's report is the light it throws on its views on the prospects of exchange rates. It stresses that foreigners have shown a voracious appetite for buying US credit products. This resulted in an inflow, which has been more than enough to leave a surplus after funding the US trade deficit. The report stresses that Japan's weak economy may portend a weak yen. The new Prime Minister of Japan, Mr Junichiro Koizumi, is about to embark on structural reforms. These reforms, if enacted, may, however, worsen the pains of the cyclical downturn. A weak yen may very well be the result. Both US and Japanese policy-makers have made it clear that they are prepared to accept a weak yen if that is the result of market reactions. The devaluation of the yen will not be without impact on other currencies. It is quite possible that China may react with the devaluation of yuan, which may well force the various Asia-specific countries to follow suit. This will have serious repercussions on the world economy. The India-specific forecast of J. P. Morgan is that, given a modest growth outlook and benign inflation, public spending is likely to be stepped up to provide impetus to a sagging economy. Consequently, the fiscal deficit may well exceed the targeted 6.5 per cent of GDP. The report also forecasts a further bank rate cut of 50 basic points. Its forecast of the exchange rate is Rs 50 for dollar by 2002 first half. One of the useful parts of the Morgan report is its forecast of commodity price movements. Referring to the oil prices, it notes the consistency of prices in spite of an overheated US market. It notes the increasing political cohesion and networking of the key OPEC members, in particular Saudi Arabia, Venezuela and Iran. It also notes the slow growth of non- OPEC production. Outside the former Soviet Union, growth has been virtually zero. J. P. Morgan's predictions are that oil prices will remain within the band targeted by OPEC - that is, around $27.9 per barrel in 2001 and $25.8 per barrel in 2002. Incidentally, the fact that oil prices will remain high indicates further fiscal tightening for the Government. The oil pool deficit will grow higher. Unpleasant decisions, which will have serious political repercussions, cannot be delayed. The sooner they are taken, however, the better it will be for fiscal health. The Finance Minister and the Prime Minister have yet another difficult challenge to meet. The decline in the world's major economies has its repercussions, unpleasant ones, on India's economy, in particular on its export prospects. The Government has to take note of this trend and be ready to handle the adverse consequences of a continuing global economic slowdown. It cannot be `business as usual'.