The slowdown in the US economy will have an impact on all countries that have economic links with that country. The Indian economy has been growing rapidly in the last four years. But can India continue to grow at a rate of above 8% in defiance of a US slowdown? Industrial growth fell sharply to 5.3% in January 2008, compared to 11.6% a year earlier. Beyond consumer durables, affected adversely by the 2007 credit squeeze, even capital goods are sluggish, raising fears about investment sentiment. This, even as global commodity prices touch new heights.
The capital goods slowdown might yet be just an aberration. After all, overall consumer goods maintained a healthy 7% growth rate, offsetting some of the problem in durables, which have done so badly because of the decline in two-wheeler sales. But signs of an economic slowdown on the whole are not in dispute any longer. The stockmarket has already crashed. Yet, after four heady years of boasting of 9% GDP growth, and talking of overtaking China, Indians are reluctant to believe that the economy is headed down.
Western observers have been lavishing praise on India as an upcoming economic superpower. So, many Indians believe that 9% growth was achieved because we are so clever and resourceful. This is self-delusion. In fact, a global tide has lifted the whole world economy of which India is a part. India?s acceleration from 6% to almost 9% of the last four years was more than matched by sub-Saharan Africa?s gain from 2.4% annually in the 1990s to almost 5.8% over the last four years. And Azerbaijan grew by a whopping 31% in 2006 and maybe 27% in 2007. Turkmenistan grew by 18% in 2006. Strife-torn Sudan is doing a staggering 12%. Rwanda, where genocide was made famous by the film Hotel Rwanda, is enjoying 8.5% growth. Liberia, the site of Blood Diamond, is growing at 9%.
So, India?s four-year record is hardly exceptional. A global boom was brought on by American overspending, based partly on a long housing boom. Americans borrowed ever more billions against their rising property values, and went on a spending spree that exceeded their disposable incomes. This is what led to a record US trade deficit of $700 billion/year.
The mirror image of this was the rising trade surpluses (and hence forex reserves) in other countries. These dollars were used to buy US securities, depressing US interest rates and making borrowing even more attractive. Americans borrowed still more, spent still more, and imported still more. This created a huge consumption-based growth cycle across the globe.
The US splurge was especially helpful to China, the most competitive exporter of manufactures. Indian services also benefited. Vietnam and Pakistan did well too. But these Asian countries needed to import huge quantities of commodities, partly for conversion into manufactures for export, and partly to meet rising domestic needs. So, a global commodities boom lifted central Asia, Africa and Latin America.
Unfortunately, no boom based on over-consumption lasts forever. Last year, the US housing bubble burst, and as prices fell, defaults began. Lenders suddenly found themselves saddled with bad debts. The consequent financial crunch hit the whole US economy. This now threatens a recession, which will lower consumer spending.
The boom cycle, therefore, is set to reverse. American imports from Asia will fall, as will Asian commodity imports from other parts of the world.
The Indian economy will also suffer, but it all depends on the pace at which the US reduces its overspending to manageable proportions. Even a recession for two-three quarters in the US, followed by a recovery in 2009, will hurt. Indian growth is likely to decline to 7%, with inflation rising to 6% on account of rising fuel and food prices.
The author is a trade professor at Icfai Business School, Chandigarh