Thursday, October 29, 2009
Wednesday, October 28, 2009
Global Economic Meltdown and India( Need for government spending)
The global economy is in the midst of the worst crisis it has seen in 70 years. The International Labor Organization says that 51 million jobs in the world economy could disappear this year. The world economic growth has slowed down to 0.5 % (slowest since WWII). However, in the midst of it all India seems to be happily claiming that none of this has much of an impact on the Indian economy. Hmmm, think again. India may not have been affected by the global economic turndown as much as US, Europe or Japan, (not yet at least), but that doesn’t mean India is immune to it.
Although it may now seem a lifetime ago, it has only been a few months since the so-called “decoupling” hypothesis dominated media coverage of the global economy. It was considered that the Asian economies would be largely decoupled from the developed ones due to the robust domestic market. Well, now since that has been disproved it’s time that we start thinking of how to get out of this mess.
India’s financial sector may have been by and large, insulated from the rest of the world, which is why the Indian banks are in better condition than its counterparts worldwide. However, the rest of India’s economy isn’t. A lot of the boom in Indian economy can be attributed to the exports of goods and services to the developed countries. Though the percentage would not be high in real terms, it definitely created a multiplier effect to help the rest of the economy.The withdrawal of investments by U.S. firms and the sharp decline in U.S. demand for foreign goods and assets have hit our respective sectors sorely. India might not be able to escape these tremors quite so easily. Now with the world economy slowing down, the exports are starting to struggle and this would affect the economy adversely.
Our policy makers are aware of this and have taken certain measures to boost the slowing Indian economy. The Indian government has acted to unfreeze liquidity by aggressively cutting interest rates, the cash reserve ratio, and the statutory liquidity ratio. It has also announced fiscal stimulus in two stages, though on a much smaller scale than in many other countries.
However, the cutting of interest rates, CRR and SLR are not enough and bailouts (like what was done in the US) should be the last thing the government should do. It’s time to revert to a bit of Keynesian economics. Keynes argued that significant and heavy spending by the government was the best way to deliver the economy from such a crisis. Infrastructure spending, I believe would provide significant boost to the economy. Government must at all times continue to invest in measures that boost the long-term productive capacity of the economy.
It is good to see that the government has already started taking steps in this direction. The Cabinet yesterday (29 Jan 09) approved infrastructure projects worth Rs. 334bln (projects included were Chennai metro and widening of 1410 kms of highways). The CII advocates an additional spending of up to 15% on infrastructure projects like roads, low cost housing, power and ports. This, in addition to providing much needed boost to domestic demand for sectors such as steel, cement and other industry sectors would also acts as large employment generators and send out a ripple effect. (Check out “Keynesian multiplier”). The forthcoming elections would also play a great role due to the heavy spending that is associated with it.
This way, in addition to reviving the economy, the tax payer also gets to clearly see where his money is going (better transport, power and health). Though such measures may lead to a short term credit crunch, it would help the economy to a great extend in the long run.
Thursday, October 22, 2009
ANIIndia claims of its recovery from global meltdown
Wednesday, October 21, 2009
Global financial crisis tops Asia forum discussion
“The global financial meltdown has been caused by a superpower and unfortunately the world is paying for it,” Iranian Foreign Minister Manouchehr Mottaki said as he addressed the ACD conference in this hi-tech city.
“The US’ ambitious policies that were doomed to fail are the main causes of the financial crisis,” he said.
Advocating an overhaul of global industrial and banking sectors, the Iranian minister told representatives of Asian governments that “justice-based ways and means could save us from the crisis”.
Earlier, welcoming ministers and diplomats from 31 Asian countries, Kazakhstan Foreign Minister M. Tazhin also called for coordinated measures from Asian countries to correct the worsening financial situation.
“The world situation in the market of energy equally causes concern. We have approached to such a stage where recent jump of the prices has caused sharp falling demand and decrease in economic activity. The urgent coordinated measures to correct the situation are required (from) Asian countries,” Tazhin said.
The day-long meeting expressed serious concern over the impact of global financial crisis on Asian economies and stressed the need for joint efforts to address the issue by “coordination in a concerted manner through balanced improvement of global financial institutions in Asia”.
Russian Foreign Minister Sergey Lavrov said the Asian region had a role to play in solving world problems.
Lavrov said the world was gripped by the crises that “stress the necessity to promote collective methods of solution of world problems on the basis of possession of equal rights, mutual respect of interests and recognition of variety of models of development”.
“ACD is an important part of developments in regional cooperation. This young dialogue structure is at the stage of organisation,” the Russian minister said.
Amongst the issues discussed at the meet are the energy and food crises, development of an international transport corridor and initiating a common financial management in the region.
The Indian Ambassador in Astana, Ashok Sajjanhar, said the global food crisis was man-made and needed to be tackled by close cooperation among Asian states.
Sajjanhar proposed to hold a track-II ACD think tank meeting in India in 2009. The proposal was welcomed by member states.
The ACD was formed in June 2002 in Thailand to build links in the region by incorporating every country and form a community to consolidate strengths and competitiveness of the continent by maximising the diversity and rich resources in Asia.
Thursday, October 1, 2009
Economic Meltdown – How Far and What to Do?
I had occasion to keynote the annual Housing Conference in Washington State. In that speech I suggested to a skeptical audience of housing, building, and real estate officials that the debt problem then appearing was deeper and more structural than currently accepted. The economic indicators, stock market performance, and general near panic in official circles in the past week suggest that my analysis, not unique but unusual at the time, was correct.
This past week we heard the first proposals to shore up the general economy from Democrats and the President. The problem, however, is deep and structural and even cultural. It has to do with energy, with lifestyle, with the shape and form of what we build, and with global politics, and more.
One of most provocative and controversial observers of this scene is James Kunstler. His observations will usually take you over the edge where you peer into a true crisis. But, if you ignore this view you may miss the starker challenges that we face. His most recent blog entry, “Disarray,” is one of his best, because it summarizes the data has he sees it, then goes beyond that to list steps that he believes must be taken, soon. These include, stop highway building and instead start building rail, end subsidies to big ag and instead direct dollars to small local farmers, begin planning and construction of harbor and river shipping facilities (less energy intensive shipping), re-direct new development, decide about nuclear power, prepare for the end of current global commerce as currently conducted, prepare psychologically to downscale, take a time out from immigration, prepare for a lot of paper “wealth” to disappear, prepare for a psychology of resentment.
Some of Jim’s solutions here are perhaps cases of constant solutions in search of problems to attach themselves to (i.e., his preferred future vision), but this is a useful list of thinking to be considering as the economy plays out in the next months and years.