Has Recession Started Spreading Tentacles Over India

HAS CONTAGEON OF RECESSION REACHED INDIA? OM PRAKASH YADAV

The

global economic crisis has slowly been spreading its bloody tentacles over Indian Economy. There may be difference of opinion with respect to the magnitude of its effects in terms of percentage or odd figures, but there is no denying the fact that the contagion has started spreading gradually into the financial and economic health of the Nation.

TRENDS AND FIGURESFigures released by Index for Industrial Production (IIP) a week ago stated that the Industrial production has shown negative growth of 0.4%. The data suggested that in the same month of previous year, the growth in Industrial production had been 12.2%. The figures also suggested that except the coal, all other key infrastructure industries like cement, electricity, finished steel, crude oil and petroleum refinery products etc. showed growth in decline mode. These data sounded alarm in the North Block and the then FM hurriedly reviewed the situation. Soon after this, one set of disagreement appeared in the some of the Newspapers refuting the figures on the basis of method of calculations in finding out the figures of Industrial growth. IIP also made some correction and

clarified that the slowdown is not of that magnitude and the figures are a little bit miscalculated and thereby inflated. Nonetheless, there is no denying the harsh reality that the slump has started making its jittery felt in many sectors of the economy. Kamal Nath, the Commerce Minister states that there is decline of 26% in FDI, which means less funds coming into the economy from outside. According to one estimate, the FDI had swelled over a period of time and has risen from a dismal 95,639 Crore in 2003-04 to rocketing 16,54,949 Crore in 2007-08. The external commercial borrowings (ECB) which had registered 30% increase during 2006 to 2007, suddenly showed nosedive in October, 2008, when it declined from 283.49 Crore in September 2008 to 112.52 Crore in October, 2008 showing a reversal trend of 30%. If fact, the total FDI from US itself during 2000- 2008 is about 5.4 billion USD. The worst hit by this reverse cash flow is the software industries, which witnessed decline of 5.8% in FDI. This sector has been the fastest growing among all sectors registering 70-80% growth rate per annum over a period of time, contributing 8.4 billion USD in 2007-08 to the FOREX on the country. The swelled FOREX and spilling FDI have also been witnessed in increase of the share of Import-export to GDP, which has increased from 21.2% in 1997-98 to 42% in 2008-09. Undoubtedly, since the contraction in global trade, volume of export-import would now decrease resulting in cascading effect on the overall

growth of the economy. In fact it has experienced 12% down fall in the month of October, 2008.

COMPARATIVE EFFECTS ACCROSS THE GLOBEThe US, UK, France, Germany, Italy, Canada, Japan and a host of other developed Nations have officially entered into Recession. Most of them have announced so-called bailout packages also for taking the ship out of the economic tsunami or at least to mitigate the effects of this contagion on their people. For instance USA, Russia, UK, Germany, Belgium, Ireland, Iceland, and France injected 990, 200, 876, 50, 16, 864,300, billion US dollars respectively in form of bailout packages. Indian and China however acted slightly differently. Instead of injecting money directly into market, China launched massive infrastructure construction by making available 586 billion USD and undertook massive construction in roadways and railways, whereas; India reduced CRR, SLR, Repo and reverse Repo rates and increased the diameter of pipes flowing money into the market through Banks. It is due to this paradigm shift in strategies of mitigating the crisis, India and China stand at slightly different stage. But in West and America, these monetary injections also could not act as anti-pyretic and the fever continues to run high except for transient respite in the economy. The growth rate of Japan has shrunk to less than one percent and rate of un-employment is rising unprecedentedly. Only few days ago, Sony, the electronic giant, has decided to cut the job by 80,000 and to shut 10% of its factories across the world.

The US economy is worst hit leaving 5, 73,000 Americans jobless, in Britain it has dangerously reached 1 million, 75,000 increase from last month. Thousands of European and American citizens are left homeless now due to debt-fuelled housing bubble. The US labour department’s figure suggests that the rate of unemployment has increase to 6.7% in November, 2008. The GDP of USA in Q3 is dismally – 0.5%. Federal Reserve estimation is that the US economy is expected to contract at an annual rate of 5% or so. The commerce department is not letting loose hope and unenthusiastically suggests that the economy will grow up to 4%. Even if this figure is accepted, it is hopelessly poor in view of the past performance. Financial market is in shambles. The Federal Reserve has been continuously decreasing the rate of interest but in vain. The magnitude of fiscal leverage and financial deregulation are such that the treasury department has not yet been able to know that how much money actually is involved in ‘Toxic assets’ of the Banks in America facing closure, so that healing measures might be taken accordingly. The other indicators in US are also not encouraging. For instance, the consumer spending has come down by 3.4% and consumer durable asset spending has fallen drastically by more than 14%, which would led to further cut in supply resulting in contraction in the economy. The Keynesian spending has so far not been able to bring the economy on tract.

Russia could also not remain insulated and an ‘island of stability’ as referred by its Finance Minister Alexei Kudrin. Russian FOREX of 600 Billion USD is fast depleting and causing concern in top echelon including Putin. The manufacturing industries witnessed 15.3% plummet, whereas; production in core infrastructure like coke, cement, fertiliser and rolled metal fell by more than 30%. Similar is the case in other parts of Europe also. The growth fell to -0.5% in Germany, to -0.3% in France and Italy and not surprisingly zero % in Netherland and Spain. It is said that friendship is tested in distress; the non-consensus among the 27 members of European Union (EU) has once again proved Shakespeare’s saying true that when sorrows come, they do not come in single species but in battalion. The ‘European Rescue Plan’ of EU has failed to take off owing to lack of consensus among member countries. Germany is reluctant to support Britain and France on most of the issues. There are several issues where disagreement is putting hurdles in progress. The confluence of disputes may be no coincidence. The disagreement is such that Ms Markel was not even invited to a ‘mini- European summit’ in Downing Street. Such disagreement at this crucial juncture will make European predicament more difficult and worsen the situation much more exponentially. The scramble for leadership in new global financial order has begun. The much talked Washington Summit held previous month, has also failed to yield positive and healing results because elusive consensus could not be arrived

at. The West’s frowning on capital control and their staunch penchant for laissez-faire have been allowing the situation going from bad to worse.

World Bank has perceived the above situation and has recently forecasted that the Great Depression of 1930 is looming large and situation which followed thereafter is likely to be repeated again globally.

INDIAN CONTEXTMONETARY AND FISCAL STEPSIndian economy, though in stress, has been doing fairly good, especially in view of prevailing economic malady all around. The growth rate is expected to be 6.5 to 7.5%, if not more. The rate of inflation has been witnessing downward trend in successive weeks and has come down to single digit number, it is expected to come down further, thanks to the bold and effective fiscal and monetary measures taken by RBI and Ministry of Finance. The major contributors to the GDP like service and agriculture sectors have not hitherto affected as badly as other sectors. The flow of FDI in service sector which roughly contributes 45-50% to GDP has risen from 13,903 Crores in 2003 to 1, 43,776 Crores in 2007. In terms of percentage also, FDI in this sector has registered increase of 23.2% in 2008, which is 1.2% more than the previous year. Agriculture- it continues to play a vital role in growth of India contributing 20-24% to the GDP. As the financial market has very little to do with the

agrarian economy, the financial crisis has not affected this sector to the extent it has affected other sectors of the economy. The ‘LOAN WAIVER’ of the Union govt announced in the budget this year has provided stimulus to this sector and is working as bailout package. Although it has failed to check the farmer’s suicide completely and according to National Crime Record Bureau (NCRB) 16,632 farmers have committed suicide in 2007 in which 4238 have lost their lives in Maharashtra only. This situation must change; let feeders of nation do not die for want of food. They actually constitute what we call ‘fundamentals of economy’. RECIPE TO KEEP ECONOMY VACCINATED AGAINST EFFECT OF PANDEMIC OF ECONOMIC SLOW DOWN IN INDIA The economic policy of any country is not governed by the kind of people who govern the country; rather by the kind of people governed. Here lies the crux of the problem as well as solution. Instead of mimicking the west and US, we should think in terms of evolving strategies to mitigate the after effects of global contraction by increasing the domestic saving and domestic market demand. There are some steps which are urgently required to mitigate the effects of global recession1.MAKING AVAILABLE MONEY FOR PUBLIC SPENDING-

With the flight of foreign capital, the market is likely to contract leading to fall in production and demand. The consequential effect would be as expected, be discernible in rise in unemployment. This would create a vicious circle and if India gets trapped into it, would enter into recession. It is said that every cloud has a silver lining. The best way to get insulated from it is unearth capital and money from within, instead of begging from others. We need to have voluntary disclosure scheme (VDS) like measures to take the black money out of the shelves of millions of people in India. The volume of domestic saving in Banks and postoffices can further be increased by taking some specific monetary policies. This would ensure increase in availability of liquid in the market and help taking fiscal steps to tide over the crisis more effectively. Help from external source at this juncture when every nation, rich or poor are facing acute fiscal pain, is a futile and unwise venture. 2.NEED OF PARADIGM SHIFT IN LENDING PATTERN OF MAJORITY OF BANKSThe fiscal and monetary steps taken so far by the RBI and Finance ministry have been not as unsuccessful, as many economists had thought. Unfortunately, all focus is converging on big industries and banks. The media hype have been diverting the govt’s attention from a very

crucial sector, which is comprised of tiny and non-farm small units, which are about 5,80,0000 in number. This vast sector has been providing employment to about 105 million people in this country contributing about 30% of GDP. What a massive contribution. Ironically, these units get hardly only 4% of net Bank credit. What a neglect and what an unwise fiscal decision on part of Banks! The attitude of the Banks needs to be changed. The experiences suggest that a Bank Manger is more interested in disbursing loans to bigger entrepreneurs rather than small investors. It is perhaps due to the fact that they are interested in achieving financial targets and not physical. They feel it convenient to deal with less number of entrepreneurs for obvious reasons. It the credit given to these units is increased only by 1%, it would bring about unbelievable change in the growth pattern of the economy. It would increase about 1, 00, 000, 00 employment and add further about 0.5% to the GDP. Merely injecting liquid into the market either directly or indirectly through cut in interest rates is not going to solve the situation for ever. The bailout packages across the world have failed to mitigate the throes of this economic ailment for many reasons, one being siphoning off the money by big banking and business tycoons. The FBI has already taken up

investigation into ‘housing mortgage fraud’ and the role of Fannie Mae and Freddie Mac, the housing mortgage giants’ in the present crisis. In Russia also, about 160 billion USD has been pumped by the central Bank, but it failed to stop downslide of rouble. Many prominent citizens have written an open letter to Putin and Medvedev stating therein that the major chunk of the bailout package has been eaten up by large corporations and banks. We cannot rule out in totality, the possibility of such siphoning off incidents. 3.

UNORGANISED SECTOR NEEDS STIMULUSThe unorganised sector in this country has been hitherto one neglected area. Parliament has passed the ‘unorganised workers’ social security Bill, 2008’ only a couple of days ago. It is milestone in the economic history of this nation. At present, according to one estimate, there are as many as 30-34 Crores unorganised workers in this country. National Commission for Enterprises in the Unorganised Sector (NCEUS) has recommended for setting up of a NABARD like financial institution so that loans etc can be made available to them at comparatively lesser interest rates and more conveniently. We need to have a more generous policy towards them not because they are at the fence; rather they are contributing magnificently to the overall

growth of the nation. Unfortunately even after successive robust growth, only 20-25% of the population have been dinning the slice of development and rest 75-80% are still longing for a loaf of dividend. This is not philanthropy; this is pure economics, the Keynesian theory, of which the West boasts off so frequently. Let the purchasing power be increased of majority of the population; or else the citadel of prosperity would crumble down like playing cards. This is what is happing globally. Shopaholic culture of west and unfettered financial institutions are not suitable for country like India. 4.

FOOD, SOCIAL SECURITY AND RURAL DEVELOPMENT SCHEMES - Many Western countries including America are now a little bit surprised to the see India get going with relatively more pace and throttle in this period also. The west’s frowning on laissez-faire now faces extremely rough weather. The American and European newspapers which usually used to be flooded with editorials and columns deploring and criticising slow pace of reform in India; now preach their own governance and financial system about the capitalism blended with social responsibilities. India has a well institutionalised chain of Public Distribution System (PDS) shops is roughly 4.78 lakh in number and which is catering to needs of

652.03 lakh BPL families i.e. about 30% of the population. There may be pilferage here and there in this chain of distribution of food grains, but one cannot deny the importance of these shops in terms of maintaining supply line strong enough to cater to the needs of billions of people in rural areas. It ensures actually at least enough food grains in the local market; otherwise the situation in the countryside would have been much more precarious. The availability of food grain helps stabilising the price of commodities also to an affordable level. The social security schemes like old age pensions, family pension, widow pensions, poor students’ stipends and a host of other such schemes are like blood capillaries of the economy. Such measures are taken being taken by the west as crisis management steps; whereas here in our countries these are institutionalised but non-philanthropic schemes. These are the inherent and inalienable rights of our poor citizens, we believe. These are the measures which are proving very helpful in this hour of distress. It is not merely a chance that we are not hit as hard as the west and other Nations are; rather it is due to our socialistic and humane approach which is paying dividends. The National Rural Employment Guarantee Act, 2005 (NREGA) was a land mark in country.

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In 2008-09 budget 16,000 Crore rupees has been allocated and later on additional 10,500 Crore was made available to this innovative scheme. If all wage oriented rural developmental schemes are added, it comes roughly more than 60,000 Crore rupees. Many people may not be optimistic about the performance of these schemes on the pretext of reports of corruption and otherwise, but it is acting as a bailout package in this period of economic crisis. It has magnificently increased the purchasing power of millions of poor Indians, which according to Keynesian also mitigating the after-effects of economic slowdown. We need to do much more because much is left to do. The figures of NSSO regarding poverty and spending pattern are not encouraging. We need to bridge the gap between ‘haves and ‘have nots’. REFORMS IN FINACIAL SECTOR AND MONETARY POLICIES- This crisis has all set to unleash forces of resurrection and drastic reform. When Asian crisis hit majority of countries like Malaysia, Indonesia, Hong Kong etc, America prescribed menu for their revival; which included three things. Firstly not to cut interest rates. Secondly let the Banks go bankrupt and thirdly encourage saving and cut public spending. Ironically, when America is hit

this time, it is doing exactly the reverse. The toxic assets have been bought, interest rates have been drastically cut and finally the public spending is enhanced and public is being advised to spend more. How can be two prescriptions for same ailment? Hindsight is always better than foresight. We must ponder on the financial sector reforms, a reform not be benefit corporate sectors only, but for the poor people also. The CD ratio of many states has to be improved in order to bring parity in the development. The blind imitation of west in this sector is disastrous; it has been proved beyond doubt. Even the Americans have now started discussing the legitimacy of blind race of development based on excessive financial leverage. Cutting of CRR, SLR, REPO, REVERSE REPO rates etc are good to some extent, but it should also be ensured that money is used to ease out the effects, and not being siphoned off by unscrupulous speculators and corporate managers as was done in USA and Russia. This might have been done in many countries also, which only time would unravel the truth. How can the govt finance and buy the toxins of some rich people with the help of the money of billions of tax payers? The financial sector should be reformed in such a way which cares for all and not for those only who could go the FMs meeting to extend their so-called valuable

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advices at the eve of each budget. In fact Nobel Laureate Joseph Stiglitz while delivering the 10th D.T.Lakdawala Memorial Lecture on ‘ crises Today and the Future of Capitalism’ said that this US exported recession is caused due to crisis which is US in origin due to the policies based on ‘ privatising profits and socialising losses’. This is not the capitalism, he said. Public spending in infrastructure has to be further increased. According to one estimate about 80% of the infrastructure is created by the public spending. It helps create infrastructure at the same time generate enormous employment opportunities. The SEZ policy, which has been borrowed from China, should be re-defined. This cannot be allowed to be used for real-estate developers. In fact present outcry by a section of farmers in different areas are said to be due to these reasons. It ought to be oriented for industrial ventures and creating infrastructures. INDIA SHOULD STAKE CLAIM IN THE EMERGING NEW GLOBAL FINANCIAL ORDER- The American dominance on global financial order is all set to come to an end. Zakaria has predicted Post-American global economy. The wheel has turned around and American economy is in desperate need of money from developing nations like China and

India. Undoubtedly, China has emerged as the biggest player and largest bargainers in this present crisis. It’s huge FOREX of 600 Billion dollar and huge domestic saving has started paying dividends. Both India and China can use G-20 forum to press for change in the global financial architecture and also speak on behalf of 152 Nations which had not been invited in Washington Summit. Globalisation, after all means maximum good for maximum numbers and not for a few, who reaped the profits and distributing the losses to the poors. IMF Chief has set 2% growth rate for major countries and suggested that govt spending should increase and interest rates be further cut. The question is that from where the money would come? How can govt enhance public spending? India has still a huge potential of domestic borrowing. The govt will have to instil confidence in masses to encourage bank deposits. India has to come forward with renewed vigour and stake claim to be a major player in the new world order, because it is said no one gets anything if begged, one has to claim for this.