Column: A word of caution

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January 26, 2015 3:40 AM

While optimism prevails about India’s growth, global fragilities could affect the country

There is a lot of hype about India Gov and India Inc. The World Bank and the IMF are bullish about India. There are diagrams in newspapers showing that if India grows at x% higher than China for thirty years, it will surpass China. At various melas, investors are pouring in from around the globe and signing hundreds of MoUs. Sensex has quite lost its head. What is left to do ?

Hence, a word of caution has to be entered. No economy has ever grown at a constant rate for thirty years above or below another economy doing similar things. After the experience of the Asian crisis of 1997 and the global financial meltdown of 2008, after twenty years of boom, we should learn that the global economy grows in cycles of good times and bad. The Biblical saying of seven fat years and seven lean years may be only for an agrarian economy. Modern economies have more good years than bad, but perpetual growth cannot be taken for granted.

The global economy has several fragilities which have not come to India yet. The weakness of the Euro had so strengthened the Swiss Franc that the Swiss monetary authorities had to put a cap on its upward rise. When they removed the cap, several forex dealers were shocked into bankruptcies. The pending Greek elections (whose results should be coming in as you are watching the Republic Day Parade) may deliver another shock. If Syriza the left-wing populist party wins a majority outright,Greece may exit the European Union (EU). This may not be altogether a bad thing. It may lead to rethinking and restructuring of the Euro in two tiers, which may ease the burden on the southern European weak brethren like Spain, Portugal, Italy and Cyprus.

Of course, the worse outcome in my view would be for Greece to elect a hung parliament and a coalition which can neither reform the economy nor exit the EU. Either way, the entire Eurozone will be a low-growth zone for the foreseeable future. The dollar continues to be strong thanks to the robust recovery in the US. The rupee has stayed the course since the FII and FDI flows are strong. There will be no hope of a depreciating currency to help Make-in-India the way China managed its manufacturing prowess.

Unless, of course, the Budget deficit turns out to be tougher to bring down than the market would like. In the July 2014 Budget, finance minister Arun Jaitley took on the Chidambaram fantasy numbers and did not expose the fudge. Now, he has to demonstrate that he has been able to keep deficit in line with his projection.

The noises coming from the finance ministry indicate that revenue collection has been disappointing and divestment has yielded less than projected. This may all prove not true and on February 28, Jaitley may yet surprise us all. All those who are bullish about the economy should fervently wish for that outcome.

While there have been a number of small and important changes in policy, nothing has yet been done which one may call a big bang. Perhaps, the government does not believe in big bangs but in steady progress. It may be happy to get to a level of 6.5% growth climbing to 7% slowly by 2017. This would be an improvement on the previous three years but not on the first eight years of this century. India is capable of 8-9% growth.

Of course, in those days, the global economy was buoyant and some of the extra growth may be credited to that. As of now, the US and the UK apart, there is not much growth in the developed world. The low oil price will affect many emerging economies adversely , Nigeria for instance.

Among the BRICS, Russia is in trouble and so is Brazil. South Africa is not about to turn around. It is only China and India who hold the lead in growth.

The oil price fall is a boon for consumers around the world. The low-inflation regime which has been there in the developed world, especially in the Eurozone, is likely to continue. This is not an unmixed blessing. It is an after-effect of shale oil discoveries which has, like a Schumpeterian innovation, finally had the effect of transforming the calculus of energy costs. Nuclear energy, always expensive, may become uneconomical if the oil prices stay low. Indeed, the Indian policy makers should urgently review the medium-run scenarios for energy policy before committing any more resources to nuclear energy. Germany, with its precipitate decision to abandon nuclear energy after the Fukushima disaster, may turn out to have been prescient.

One just has to hope that the many fragilities in the world economy will not blow India off course in its development strategy. Moderation always carries the risk that it may be unable to withstand a strong external shocks.

The author is a prominent economist and Labour peer

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