‘A Minor Tremor Will Also Hurt’

The following analysis originally appeared in Tehelka Magazine, in the February 9, 2008 issue.

JANUARY HAS BEEN a torrid month for the US economy. Risky lending on property has hit banks, real-estate sales have fallen 12 percent, and the stock market looks dangerously bearish. To stave off a recession, the Federal Reserve slashed interest rates and Washington unveiled a $156 billion stimulus package. Pessimism concerning the American economy is causing ripple effects and losses are pegged at $5 trillion.

Economists and politicians have tried to downplay the impact of a US slowdown on India. But, even a minor slow-down in the US market could hurt India. The US is the largest consumer market, valued at $10 trillion a year: ten times India’s GDP. It accounts for 15 percent of Indian exports, worth almost $19 billion in 2006-07. Of these, almost half consists of jewellery, precious metals and precious stones ($4.8 billion) and clothing and textiles ($4.4 billion). While the latter may be unaffected, the former could be casualties to American belt-tightening.

India could also suffer from jolts to the global supply chain. For instance, India’s sizeable exports of iron ore to China may be affected as the demand for Chinese products decrease in the US. Indian imports from the US, $11.7 billion in 2006-07, are not likely to suffer much, and could gain should the dollar weaken further. On investment, India should remain insulated: US FDI to India is a paltry $850 million while Indian investment in the US is about $2.2 billion.

It’s too early to ascertain if a recession is imminent, let alone estimate its effects. The US may ride out this economic blip, as in 2000-2001. Consumer confidence, which dropped precipitously in late 2007, appears to have rebounded in January. Prevailing pessimism, however, means that the days of plain sailing for the global economy appear to be, at least temporarily, over.

Sell Reforms Well to the Poor

This article originally appeared in Tehelka on September 29, 2007.

At the importance of any issue in Washington can be measured by the number of seats it fills. A discussion about Indian politics attracts only the most die-hard Indophiles. A discussion related to the Indian economy, on the other hand, can pack a large auditorium. Despite its military firepower, nuclear aspirations and unrivaled multiculturalism, it is India’s economic potential that has secured the unprecedented attention of the world’s sole superpower. Among other things, Americans are in awe of India’s technocratic leadership, impressed and intrigued that a vibrant and frequently populist-oriented democracy such as India’s can elevate the likes of Manmohan Singh, P. Chidambaram and Montek Singh Ahluwalia to leadership positions. Yet there is also frustration that these reformers have been unable to secure a clear political mandate for their attempts at further economic liberalisation.

There has long been intellectual awareness in New Delhi of India’s need to engage the rest of the world. But the fact remains that Manmohan Singh’s government has done a poor job in selling reforms to the people. With many such reforms including opening up Indian agriculture to large-scale farming and distribution systems, the government has made itself vulnerable to broadsides from anti-globalisation, isolationist elements who claim that such reforms override the interests of the poor. Quotas, subsidies and the distribution of colour televisions are portrayed as schemes to benefit the poor, when in fact they divert attention from policies. Even unprecedented economic growth has been turned upon its head amid accusations that such growth has not been inclusive. As a result, even India’s growth itself is occasionally portrayed in a negative light. The bottomline gets overlooked: that the risks of uneven growth outweigh the certainty of decelerated growth. Perversity in small doses may be less harmful than epidemic complacency.

The combination of complacency and resentment in a high-growth environment makes the Indian economy deliciously enigmatic to speculators. With a slumping housing market, stock market and volatility, the likelihood that America will soon experience a recession is all but certain. When exactly and for how long this will happen, are less clear, but chances are, the rest of the world will not be unaffected. India may soon find itself desperately trying to adapt to a recessed global economy. Its expected shortfall in energy, infrastructure, and human resources, stemming partially from its reluctance to liberalise, will not be of any help, certainly not.