Encouragingly, the American economy expanded at a 3.5% annual rate in the third quarter. The Indian economy grew by a significant 7.9% in the second quarter of this fiscal, which is more than what is anticipated. Encouraging reports are surfacing from recession-hit, export-dependent East Asian economies such as Taiwan too. Does all this mean the end of the crisis?
Or, may be, we do not know for certain, or at least that is what one wonders listening to the surprise announcement from the Dubai World, the conglomerate of ports and property, in November, of a six-month payment standstill on its billions of debt. So is the case with Greece, which is running a budget deficit of around 13% and public debt of 125% of GDP; and a few other members of eurozone are said to be equally at risk. Emergence of something new—a sovereign risk?
Or, is Dubai debacle a forewarning of the chaos underlying the economic recovery that the world is chirping about? May be it is a pointer to it, for the world economy continues to be haunted by the excess capacities created during the boom times. Unemployment in the developed countries continues to show no improvement. Fiscal stimulus and easy monetary policies resorted to by countries to fight recession are now fanning new troubles. Global stock markets are intermittently exhibiting rallies, though there is nothing much to gloat about the performance of corporates across the globe.
Even China is sending disturbing signals: regulators are warning the banks that have made massive lending to fight downturn, to either meet the capital requirements or risk sanctions. It is refusing to let its currency appreciate, as sought by the US and Europe, for their exports are continuing to fall—its net exports have fallen by 4%, while current account surplus has fallen to 6% of GDP from 11% in 2007. It does not wish to let the yuan appreciate in bits and pieces, for it would lead to speculation in currency markets and inflow of hot money. Nor is it in a position to allow it appreciate at once by the required percentage of, say, 25%, for that would throw many of its exporters out of business.
Coming to the US, its budget-deficit touched an all-time high of $1.42 tn at the year ending September. With overindebted households and distressed banking system, consumer spending is still on hold. But with the free flow of dollars around the world under the name of stimulus in the US, and the perceived growth prospects in Asian countries, the latter’s stock markets are outperforming US and European markets. Carry trade is once again on a high swing. A clear indication of asset bubbles?
The net result is: no end in sight for the global imbalances. So, the need for rebuilding the global financial system on a stable foundation is the imperative. But nothing concrete has yet emerged except for everyone talking about: empowering the Financial Stability Board, proposing higher capital requirement for banks considered too big to fail, improving regulatory resources, overhauling rating agencies, working towards setting right the global imbalances, etc.
What does all this mean for India? Debt-driven growth cannot be sustained for long. We need to hone our exit strategies and reforms—create competition in the fields of services and agriculture—to generate new revenues. Simultaneously, ‘social reengineering’—setting right the functioning of primary schools and primary health centers, and guaranteeing employment and food to the people below the poverty line—must be aimed at. Some worry, albeit rightly, that such monies are more prone to end up in the hands of the agencies engaged in its distribution. Obviously, it calls for reengineering the administrative mechanism. And the youth is hopeful of these ‘perceived possibilities’. Let us start working towards it —the New Year will certainly be brighter!
- GRK Murty
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