Indian Economy
India and the Global crisis
Amir Ullah Khan
Anyone watching the world economy is now pretty sure it is in recession. The US is going through tough times as they find their large financial institutions collapsing. The government has decided to spend more than 700 billion dollars trying to revive the economy, but nothing seems to be working yet. The large multi lateral institutions like the World Bank and the International Monetary Fund are clueless and don’t really know what went wrong or what would make things improve. Where does this leave India?
The first impact that has been recorded is the huge erosion in India’s foreign exchange reserves. Estimates are that these have come down by more than 60 billion dollars in the last six months because of export slowdown and institutional investment withdrawing dollars to pump them back at home in the US or in Europe. The question therefore is whether this decrease in reserves matters. One way to look at it would be to argue that large reserves are only notional - feel good figures. So long as there is enough money to cover at least three months of imports, there is no pressure on the balance of payments. Even at 250 billion dollars, India will have enough foreign exchange to pay for its imports for at least a year.
Secondly, it is clear that firms in the US are now finding it difficult to carry out their businesses. They will all be looking for various ways in which to cut costs to become competitive. This would mean they rely more on outsourcing which enables them to bring down their expenses. This is particularly relevant to the IT and the ITES sector in India. With the rupee at its lowest in recent times, US firms will actually benefit a lot if they get work done in India now. However, under government pressure, if outsourcing activity from the US reduces, India firms will find it difficult to maintain their operations. This could result in some people losing jobs and new people unable to find call centre jobs with the ease they have been accustomed to in the past.
It is questionable whether the state can still influence private activity in a country like the US. So, the President elect’s campaign declaration on discouraging US firms to outsource is not likely to have significant impact. The ITES sector in India, provided it can tackle skill shortages, should continue to grow, if not as spectacularly as it has done for the last two decades.
The third issue is one of fiscal deficits. The clear solution for developing countries amidst such meltdowns is to invest heavily in infrastructure. With global finances coming down, it will be public spending that will go into infrastructure. With this, there is bound to be a selling of fiscal deficits. India already is looking at a high fiscal deficit this year on account of various development schemes in operation, pay hikes for its government employees and loan waivers for its farmers. But in these difficult times, does anyone really care about mounting deficits? Those who could have objected, institutions like the IMF and foreign investors, are themselves in poor shape and will not be able to lecture the finance ministry any more. Again, like in the previous two paragraphs, the global crisis perversely comes to India’s rescue.
Finally, the good news on the inflation front. With crude oil prices going down by the day, the pressure on fuels has already subsided. The weather has changed for the better, domestic demand for electricity is already down and with vegetables being harvested across the country, it is not surprising that inflation rates at back to the single digit levels. With this, the need for monetary tightening is no longer called for. Cash reserve ratios are already being brought down and now if interest rates come down as they should, domestic investment should not be as dull as it has been last quarter. There is always an acute awareness of high prices on the political front. Therefore any hint of price rise results in a clamour for increasing interest rates. It is easy and facile to put the blame for inflation on increases in money supply, because looking at supply chain inefficiencies and the pernicious effect of poor regulation and corruption is discomforting. If interest rates come down, the manufacturing sector should be able to recover and continue to grow from now to March when historically growth has been high after relatively poor growths in the second quarter of each year.
This is not to say that India is or will remain completely immune to the global economy. In fact the truth is that India has been and will be impacted by the crisis. However, given the nature of crisis and the way it plays out differently in the developed and the developing economies, it could very easily give India a chance to push its case better and argue for a new global order that is better equipped to handle new and complex issues and is more inclusive of emerging economies than it has been in the past.
This point in time is certainly an opportunity for India to influence the pace and the pattern of globalisation in not only the financial market, but the agriculture and the service markets too. As most multilateral institutions get reformed, they will need to be restructured to be prepared for shocks. And as the world sits down together to talk of regulation, India should be able to argue for a harmonisation and standardisation of regulatory processes that would enable transactions across borders, without creating new problems and crises.
Director of India Development Foundation, Amir Ullah Khan studied Electronics Engineering at Osmania University and did his PhD on Intellectual Property issues. After a brief stint with the Indian Civil Services, the author also worked with LARGE (Legal Adjustments and Reforms for Globalising the Economy) of the UNDP, Indian School of Finance and Management, Encyclopaedia Britannica India and the PHDCCI.
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