The Bric economies should be congratulated for the cohesiveness demonstrated by them at the Horsham Summit of G-20 finance ministers and Central Bank Governors, but they should not waver from introspecting on what they must do to attain their full potential.
That is why today?s theme is neither about all the four Bric economies, nor about the G-20. The focus is on how prudent, and abstemious, fiscal policies in the halcyon days of growth might enable an economy to pull out of a seemingly intractable slowdown tomorrow.
The Bric, of course, have been greatly pleased at being invited to become members of the Financial Stability Forum and, even their wish for greater representation, in say, the Basel Committee on Banking Supervision is being fulfilled. Both flow from long-standing Bric demands that were reiterated in their March 14 Joint Communique. And, clearly, their aim of levering out greater ?voice and representation? in international financial institutions like the IMF, or multilateral development banks such as the World Bank is being met. Next in line, in fact, is another Bric demand?the realignment of Fund country quotas, and that might materialise anytime between April 2010 and January 2011.
Yet, the Bric should realise that no part of their elevation to the ?high table? of international policy making, or finance, would be bereft of the expectation that they would play the role of a ?locomotive?. It is, after all, they who possess the leeway to do so. Not only have they been exemplary generators of growth, they have also reaped dividends, because of which they sheltered their financial sectors.
Yet, the only question that remains after the onset of recession is?do they still retain any leeway to accelerate their economies and create growth spillovers for others? Take China, for instance. It has a fast growing, but comparatively sequestered economy. But, does it have policy space, and enough instruments, to act?
There are many indications that it does. It currently holds the largest share of US? T-Bills, hosts a mammoth share of US foreign direct investment and the condition of its economy should conduce robust growth over 2009. Accordingly, strong expansion should be the fallout of China?s $585 bn (Yuan 4 trillion) stimulus package?added to other proposals like a Yuan 500 bn tax cut and financial support to industry. Such a package should supercharge China?s expansion by between 1.5 to 1.9% in 2009 and yield 8% growth in 2009?or just a single percentage point below 2008?s number. Most estimates would agree that such an erosion in growth would not greatly hurt Beijing?s rate of unemployment?currently about 2.8% of its labour force.
No wonder Murilo Portugal, deputy managing director of the IMF, said recently that its growth momentum had already contributed hugely to the world economy and that it would continue to do so. He was speaking at the China Development Forum 2009 (Beijing, March 21) and his allusion was to the 13% of GDP that China intended investing over 2008-10. Portugal lauded the self-regulation and prudence characterising Beijing?s financial policy, and expressed hope that China?s vast foreign exchange reserves would greatly contribute to world economic recovery.
Clearly, China would have been far less willing, or able, to tread the expansionary path without its $2 trillion of forex surplus?plus a history of balanced budgets and an internal debt not exceeding 20% of GDP. Those should enable it to implement a powerful stimulus policy, while the one percentage drop in growth, to 8% for 2009, would come as a relief to its overheating economy.
In short, if China dares to push the budgetary line, that would be simply because it would be quite unlikely occasion inflation or other nominal disasters.
Matters are rather less simple in the case of India, where general elections are drawing near and which has a history of unmanageable deficits. And the latest is that the IMF thinks that India?s economy is positioned to grow at 5.3% (2009-10) overall, while agricultural growth attains 5.9%. Clearly, the Indian peasant is better-off with self-regulation than institutionalised dirigisme.
Not only does that dispute the official (CSO) figure of 7.1% growth for 2009-10, it cautions against the virtual certainty of non-productive uses of money (revenues as well as monetised deficits) in an election year. We can read that against FY2008-09?s projected budget deficit of just 2.5% for the entire fiscal; that number soon lost all meaning when the deficit attained Rs 1,16,000 crore ($24 billion), or 88% of the annual target, over just the first five months of 2008-09.
Even the fall in oil prices has afforded no joy, thanks to official consumerist subventions such as Pay Commission Awards, oilseed and fertiliser imports, and a constant tug-of-war between softening rates of savings and unrelenting current account deficits.
The year, in fact, turned out to be a bad one?leaving little, or no, room for stimulus. The indicators say that the stock market index fell by over 50%, while the rupee depreciated by 23% against the US dollar. Such developments have led the IMF to extrapolate 7% of GDP central government deficit for the whole of 2008, to which must be added 1.25% of subsidy-related bond issuance?which would then hike the overall deficit (including the states?) to 10% of GDP.
That immediately explains why reports of the just-concluded India-IMF Article IV Consultation say that the Fund actually expects India?s economy to slow despite the election expenditure. And, much of the slowdown would be led by decelerating corporate investment, tighter financing conditionalities on the part of banks and further declines in forex reserves. And, even if forex reserves are viewed as being enough, a comparison with China?s case will show there can be little by way of an assured stimulus under such conditions. Indeed, the Fund has even rued that none of the measures that are meant to stimulate the economy would be free of uncertainty or ?unusually large? downside risks under such circumstances.
Ironically, the Fund says that such uncertainty stems mostly from ?the larger-than-anticipated impact of the stimulus measures that the authorities have already implemented.? Recession, accordingly, rules?despite oil prices going through the floor and inflationary expectations all but extinguished.
?The author is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata. These are his personal views