Global Slowdown 2013/4 & India

By : Amit Bhushan 25th April 2013

When the economy was in distress, the consumer nations of West responded by depressing interest rates and monetizing bad debt which fueled their consumption binge further and led to financing of not so viable projects in name of job creation. Producers in Asia such as China responded by investment in infrastructure which boosted capability to produce goods and services as well as led to a bit increase (compared to the production capacity) in the domestic consumption by population within these economies. The other major economies like Japan got squeezed and have responded by devaluing their currency and so did India. Globally, most legislators had a trained their eye and scissors on fisc and this too has not been helpful as the fisc is yet to be fixed for most countries while yet again a slowdown is to be managed. Now the plan to pull their respective economies out of recession has hit its limitation. The producers will have to press domestic consumption accelerator by boosting super charged growth in creation and consumption of services through liberalization and further rise of domestic wages so that some of the workers can be weaned away and excess goods can be consumed domestically. While consumer nations in the West have raise savings, possibly by increasing interest rates to fight a deterioration of balance sheets of Financial Services on the back of failing repayments from unviable projects financed earlier. They would also need to improve 'actual' repayment of burgeoning credit from borrowers which have already reached unsustainable levels to restore confidence of investors in these institutions. The falling Commodity prices are a strong signal that the time to push accelerator in right direction has arrived and is knocking at the doors of governments and central bankers. The Commodities have been falling (against all major currencies) in spite of easy credit in West and devaluation of Yen by Japan. Principally it a signal of weakening of consumption probably due to pusillanimous Banks not supporting credit which could be basis experience in the recent past. This is likely to affect ongoing and upcoming projects to boost production of commodities/minerals in developing economies and job losses across the board. Though there is very high probability that much of the fall of commodity prices is a result of deleveraging by Hedges rather than an actual reduction in consumption, however the fall of commodities is broad based & includes commodities like steel, aluminum, copper, energy etc. which cannot be basis Hedges alone. Most of the indicators in China as well as West have not fully reflected this slowdown yet, possibly because the industry has not anticipated it yet and easy credit has allowed inventory built up of manufactures to an unprecedented level. The global book keepers such as IMF and World Bank have cut down global growth including that of trade is one of the pointers of things to come. A clearer picture might emerge in next 3-6 months. Usually such slowdowns wait for some event to reveal themselves so

that the event can be blamed to kick start slowdown & to provide suitable direction for a corrective action and such an event has eluded economics as of yet. India has a chance to emerge as a place of temporary tranquil with its Current Account deficit expected to come down on account of commodity imports becoming cheaper and with its opportunity to reduce interest rates to enhance domestic investment and consumption. However it will continue to face challenges for its exports especially those of engineering projects and goods though they may not be a major part of the overall economy as of yet. It would continue to push structural reforms avoiding political leniency, lethargy & inertia to seep into its government and build a foundation for domestic manufacturing that can compete globally for generic & innovative products & services. Over the medium to long run, its IT industry may need to progressively reduce dependency on West and focus on products and services other developing countries basis the capabilities and experience that has been achieved. Its ITeS industries will need to identify pockets where off shoring adds up a significant value not only in terms of costs alone but in overall transformation of user experience & satisfaction. India will have to achieve this in next 4- years by which time most of the large economies balance themselves out so as to not miss the Bus to partner global economies as a significant player. The recession in 2008/9 gave it an opportunity to scratch the surface through its participation in G-20, however its conduct in through this continuing difficult period to manage its domestic affairs appropriately and to raise its game will allow it to earn its space in the comity of nations.