Contribution to the New Economy

The contraction in industrial production in January by 0.5% is comforting for the simple reason that it is not as bad as was expected, and capital goods production has rebounded sharply. Disaggregated numbers still look ugly as a general weakening is evident across the board. Production of processed food, having the third highest weight in the index of industrial production (IIP), has contracted a massive 16% in January. And the slowdown appears to have widened with only five sectors reporting positive growth in January against seven in December. Transport equipment and parts, a lead indicator of commercial activity, production fell over 13% in January. Yet, the latest industrial growth numbers hold out hope. As economic slowdown deepens in the emerging markets, industrial activity in India has hovered around the levels seen last year. Even the 2% contraction for December has been revised to a better looking negative growth of only 0.6%. The feared double digit drops in manufacturing, seen in other emerging economies, has not manifested yet in India, though exports are contracting at a fast pace. The strong 15.4% growth in capital durables, though off a low base, should nullify fear over a precipitous decline in new investments. The positive growth in consumer goods after three consecutive months of contraction is also a welcome sign. This resilience at lower levels gives the hope that once the sentiment improves, there could be sharp revival in industrial activity. The stock market, too, appears to have taken the marginal contraction in its stride and rallied near 2% on positive global cues.The burgeoning debt-financed government expenditure would support consumption, though there is a case for prioritising expenditure. The only fear is that such borrowing could crowd out private borrowers. The Reserve Bank of India (RBI) can cushion it to the extent it can lower the cash reserve requirement, still at a fairly high 5% of banks’ net demand and time liabilities. The government and the Reserve Bank will have to find ways to ensure that credit needs are met when the economy starts to recover. Much of the decline in consumption appears to be sentiment driven rather than a decline in real incomes. Sentiment, as we know, can change very quickly. How much worse can it get is the question uppermost on most minds. Well, if punditry from multilaterals like the International Monetary Fund is any guide, there is no immediate solace at hand. After holding out the prospect of the global economy scraping through with 0.5% growth this calendar year, the Fund now expects growth to dip below zero. An absolute decline in global GDP, for the first time since World War II, is bad news. For emerging markets like India, whose fortunes are inextricably linked to global growth, with a large number of poor and no safety net, the Fund’s prognosis is doubly disquieting. Except to the extent the Fund’s managing director, Dominique Strauss-Kahn terms the present slowdown the ‘Great Recession’ not the Great Depression, there is reason to hope we might still escape a repeat of the 1930s experience.There are a number of reasons for this. One, world leaders and central banks have been far more proactive than during the Great Depression. We’ve seen country after country announce huge stimulus packages. Two, there is growing realisation that co-ordinated policy action, at least by the bigger powers, can alone save the day. So despite all the posturing about raising protective barriers and rise of economic nationalism, chances are we will not see a return to protectionist trade practices on a large scale. Three, the Fund itself is likely to see a sharp increase in its resources. The US administration has called for a tripling of ‘IMF firepower’. So, with a little luck, the immediate global resource crunch might be resolved. True, we might not see the rootand-branch reform of the global financial architecture we’d hoped for. But US treasury secretary Tim Geithner has already admitted, “lots of things that did not seem realistic in the past are not just realistic but compelling,” so hopefully we will see a less imbalanced global economic order in the not-too-distant future. For now, given how protracted serious reform of the international financial architecture will be, the G20 should use the opportunity of its forthcoming April 2 meeting to get the world economy out of its present comatose state and then address long-term imbalances.