Indias auto sector, for instance, experienced double-digit falls in off-take in Octoberby 10.2% for two-wheelers and 34.8% for commercial vehicles. November data reveals that off-take continues low, leading to net declines in sales for manufacturers. The resulting lay-offs and job-uncertainties can be expected to lower disposable incomes further and affect demand over the short to medium term. That, in turn, would weaken several of the backward linkages that manufacturing has.
Goldman Sachs verdict on India is that it expects GDP growth to be 6.7% for 2008-09, but 5.8% over 2009-10. Clearly, then, the biggest anxiety is about safeguarding economic growthand somehow sustaining it between 7-8%. Even Citibank has pointed out company shutdowns and project implementation delays right across sectors. Its growth forecast for 2008-09 is 6.8% and it fears that none of the current downsides will be countered in the near term by greater monetary accommodation or lower input prices.
Still, the government expects the Reserve Bank of India to do its bit. Hence, its Mid-Year Review of the Economy highlighted the need for a pro-active monetary policy.
The thrust of the argument was that global recession has been letting down industry, so domestic demand should be enlisted to help in bailing out the latter.
The RBI, of course, has complied by slashing repo- and reverse-repo rates by one percentage point each (to 6.5% and 5.0% respectively). But that still falls short of guaranteeing that banks will be free with their funds. The final call on that must be taken by their asset-liability committees. And, even for borrowers, there is no firm assurance of any revival of animal spirits.
In fact, central banks right across the world are slashing rates to spur activity. Bank of Japan lowered its benchmark rate to 0.1% from 0.3% on December 19just three days after the US Fed lowered its main rate to zero. Even Hungarys central bank cut its key rate by 50 basis points, to 10%. But there is only hope, no sign of optimism. In fact, reports of declines in outlook come not just from manufacturing, but also from real estate, hospitality and the IT sector. Hotels are struggling to maintain occupancy rates of even 50%, while huge swathes of booksellers in Hyderabad have shut down owing to a precipitate fall in demand for computer software- and hardware-related publications. (Applications for US-visas too are down).
As for manufacturing, steel alone seems enthused by the policy package. Sector watchers estimate that steel demand may strengthen following the packagewith prices being underpinned by stronger demand. Seeing that producers seem willing to pass-on all of the Rs 1,100-1,800 per tonne cut in excise duty to customers, there could even be extra demand.
Meanwhile, the easing on the monetary side has been echoed on the fiscal side. That has been done through fresh Central grants amounting to Rs 42,000 crorelifting the Centres total plan expenditure for 2008-09 to Rs 9 lakh crore.
That increase in fiscal overhang will ratchet up the fiscal deficit by an extra 2%, but that is not where matters will stop. They can get much worse if the projected growth fails to materialise. For, in that case, tax revenues will jump off a cliff and (the usual) supply-side constraints will delay the onset of growth. In short, the recession could have been used to allow a shakeout, except that the elections intervened. That, alas, is the story for all sectors.
Banks are in the limelight in Brazil too. But the president of its central bank, Henrique Meirelles is resolved to first wait and see how the governments efforts to unfreeze credit markets take hold. That is so despite the slow increase in lending following the unfreezing of rates by the Brasilia government. Reserve requirements too have been lowered, while nationalised banks have also been asked to extend greater accommodation to industries hurt by the global financial meltdown.
As for stimulation by fiscal measuresBrazilians are doubtful. They expect to be seriously hurt by the slowdown next year, and to grow at no more than just 2%. Secondly, much too depends on the recovery track record of traditional importers, like China, of Brazilian ores and metals. (China, at the moment is buying far less than it used to, and doing so at rock bottom prices; and that is something which has hit hard even Australian ore exporters like Rio Tinto and BHP).
Brazilian policymakers feel, in fact, that they lack large enough surpluses to support additional spendingand their (not so recent) brush with interational indebtedness has made them very chary of emerging market debt. A downturn, after all, spells only temporary painwhile debt is a long-term affair. And, barring Chile that seems to be the attitude of all Southern Cone economies.
There are further hurdles in the way of increased public spending. Inflationary pressures have already, once, occasioned a two-month, 20% decline in the value of the local currencywhich, in fact, has made it harder to lower interest rates (ruling at 13.75% at the end of October).
Coming, finally, to Chinathat is the economy everyone has been following avidly, expecting it to play the same locomotive role that West Germany earlier used to. After all, its economy accounted for 27% of global growth last year. But, even here, Beijing seems to have other plans.
Its first priority, plainly, is to divert all resources (and export subsidy funds) towards the development of internal infrastructure and greater consumer welfare. They would not mind if that also entails imports of raw or semi-finished goodsbut that will just be a spin-off of the $586 billion package.
Actually, Chinas official planning agency says that the (4 trillion-yuan) sum will mostly be spent on helping ordinary people over the next two years. The aim is to combat the third-quarter fall in growth rate to 9% (12.5% is kosher), declining export demand, and a rise in the number of jobless.
Beijing has also mapped out the expenditure pattern in advance. Thus, according to the National
Development and Reform Commission, the priority projects are the ones that help improve peoples livelihood, including in the rural areas, housing for the urban poor, and social undertakings. That will be accompanied by added stress on infrastructure building (railroads, bridges, highways, water conservation and environment protection).
As for finance, China has already put its money where its mouth is: it recently cut interest rates to spur consumer spendingwhich should not only raise domestic welfare but also create domestic effective demand to (partially) offset the downturn in the US and other OECD economies.
Thus, the Chinese central banks one-year lending rate now stands at 5.31%, while its deposit rate is at 2.25%. There has also been a 0.5% lowering of the proportion of deposits that lenders must keep in reserve.
There is a good chance that Chinas domestic reflation will be strong enough to blow up growth prospects elsewhere too.
The writer is a fellow at Maulana Abul Kalam Azad Institute of Asian Studies