Dr Bharat Jhunjhunwala
Signs of an impending global recession grow by the day. Growth has been negative in Japan in the recent past. Growth rate is declining in Europe with Greece, Italy and Ireland nearing crisis. China too is faltering. The United States is on a high growth path but that only underscores the problems in rest of the developed world. Prosperity in the zamindar’s household is not an indication of prosperity of the village.
Global economic growth was driven by technological innovations in the twentieth century-mostly in the US. The innovations of the automobile, missile launchers, jet airplane and the internet led to the creation of new areas of economic activities. The stream of new technologies did not keep up though and the US fell on hard times. It did not have new products that could be sold at high prices. Its share in the world economy has declined to about 25 percent today. The US economy slowed down in 2003-04. The US Central Bank “The Fed” loosened the purse strings and encouraged people to borrow to buy homes. The borrowers, however, were not able to repay the debt since the US companies were not able to ride on new technologies. The crisis of 2008 was triggered by this inability of the borrowers to repay the debt. This was followed by the Fed bringing in a series of stimulus packages. The US economy continued to grow on the basis of these artificially induced consumer demands. But income cannot be generated by printing notes. The underlying US economy remained weak. Now the Fed has started withdrawing the stimulus package. And, Lo! We have a global slowdown on our hands even though the US is on high growth path for the present. The underlying crisis that started in the late nineties has been pushed back by a decade or more but it is rearing its head again, and more vociferously.
Signs of an impending global recession grow by the day. Growth has been negative in Japan in the recent past. Growth rate is declining in Europe with Greece, Italy and Ireland nearing crisis. China too is faltering. Growth in the last hundred years has largely been propelled by technological innovations of motor car, nuclear power, jet airplanes, personal computer and the internet. The presently unfolding global crisis is due to the absence of new technological developments that would open up a new stream of economic activities.
“Fracking” or production of shale oil is the new technology today. The United States is producing about five percent of global supply of oil from this source now. It has led to an increase in global supply of oil. But fracking has not generated a new stream of economic activity like the automobile. It has only led to increase in supply of oil in the global market. The US consumer has got no new job opportunities from shale oil. The US stock markets are buoyant because corporations are making profits but the common man is in trouble. The demand for imported goods from the US is down. China, Japan and the EU are facing the brunt of this. They are sliding into a slowdown just as the sinking ship pulls down small boats along with it. The price of oil has crashed from USD 100 to 60 in last six months because of this lack of demand from the US and China.
The spreading of global slowdown has got the foreign investors jittery. They want to come back to the safe haven of New York. Tapering of the stimulus in the US has led to increase in interest rates here and provided another incentive to bring back the money. Foreign Investors are selling in the weaker emerging markets and repatriating the monies back home; and they are staying away from “stronger” emerging markets like India despite positive outlook of the rating agencies.
The key features of the present scenario are exit of foreign investors from emerging markets and declining price of oil. These are impacting countries differently. The United States is benefiting from return of foreign investments and also increased availability of shale oil. It is therefore stable. China, European Union and Japan are in trouble because of slowing of exports to the US and exit of foreign investors. They are benefiting from the lower price of oil but this benefit is small in comparison to the loss of exports and capital to the US. Proof of this is the declining rate of growth in China and deepening crisis in Greece, Italy and Ireland. Russia, Venezuela, Iran and other oil exporting countries, needless to say, are on the receiving end. They are seeing their oil incomes evaporate into thin air and also helplessly watching foreign capital flee their shores.
The impact of this unfolding scenario on a country depends on two factors. Countries that are export- and foreign investment oriented stand to lose. Their exports to the US are dwindling and foreign investors are fleeing. Those that are importers of oil stand to gain. They get cheaper oil.
India is better placed than most major economies on both fronts. The share of exports in our economy, thanks to the resistance by the Left parties and Swadeshi Jagaran Manch, is less. Our dependence on foreign investment, despite the best efforts of Manmohan Singh and Narendra Modi, is also less. So the loss from dwindling exports and fleeing foreign investors will be less than China. The gains from cheaper oil, on the other hand, will be large. Therefore, India will be able to withstand the emerging crisis reasonable well. There will be immediate hiccups due to fleeing of foreign investors but these will die down soon. We may even gain. New opportunities will open in the BPO sector. Developed countries will turn to India to reduce their cost of production as they had done in the aftermath of the 2008 world crisis.
Modi must resist the foreign investment focus being pushed by his bureaucrats. He must look inwards both for investment and markets. India is a rich country that is supplying capital to the west. Modi must make it attractive for Indians to invest their money in India. He must also put in place policies to generate demand from his own people. Policies to redistribute incomes from the rich to the poor should be considered. Indian businesses should be encouraged to produce goods for consumption by the people of India instead of producing for consumption by people of America. Modi must “look inwards” to face the impending crisis.
(The author was formerly Professor of Economics at IIM Bengaluru)
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