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.
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