Column : 2008: looking for scapegoats

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: How will 2008 be remembered? Since 2003, India broke away from an earlier growth rate trend of 6.5% and approached 9%. This year will therefore be remembered for a return to the back-to-business trajectory. More specifically, 2008-09 will probably see 7% and 2009-10 something like 6%. When will India return to 9%? At one level, this is contingent on global recovery. The IMF expects recovery to occur in the second half of 2009, probably an extremely optimistic view. Global recovery will be a long haul, perhaps 3 years. And for both China and India, it is time to bury the decoupling hypothesis. Or at least, explain what one means by decoupling. To the extent one means that long-term growth trends in these two countries, and elsewhere in Asia, have broken away from long-term growth trends in developed countries, there is decoupling. However, cyclical movements in developed countries are also replicated in countries like India, and in that sense, there is no decoupling. Not only is India’s financial sector not decoupled, its financial and real sectors have linkages. India’s export/GDP ratio is 14% with goods alone and 21% if services are included. A zero growth in exports therefore shaves off almost 3% points from GDP growth.

While 2008 will be remembered for the global financial crisis and the slowdown, any attempt to link slowdown to the global financial crisis is fallacious for two reasons. First, the slowdown preceded September 2008 and every indicator showed this. The slowdown was attributable to the tight monetary policy pursued by the government to contain inflation. Whether decline in the point-to-point WPI had anything to do with monetary policy is a question that should have an obvious answer. Therefore, 2008 should partly be remembered as the year of looking for external scapegoats, like the global crisis. That’s always easier than pointing a figure inwards. Having said this, when faced with a slowdown, what counter-cyclical policies can one introduce? That brings one to the monetary policy versus fiscal policy debate. When talking about fiscal stimuli, one doesn’t have in mind developed countries alone. There are also economies like Malaysia, South Korea, Russia and China. One might think the government has unveiled a fiscal package. However, it is too insignificant to make a dent. 0.5% of GDP is not worth sniffing it. So why couldn’t North Block do what several other governments in the world are doing?