India also falters

THERE is a tendency on the part of many in Pakistan to gloat over India’s misfortunes. The same is true in India where Pakistan’s problems are noted with some satisfaction by many segments of the population including certain influential people amongst the intelligentsia. This is unfortunate since both countries would benefit by positive developments on the side across the border from them. I have suggested in these columns on several occasions that Pakistan, being the smaller economy, would gain from the strength of the Indian economy if the two countries could shed their mutual suspicions and open up trade to commerce and their borders to the flow of people. It is in this context that I will look at the latest economic news from India suggesting that that country has also been severely hit by the ongoing global financial crisis. A few months ago, there was confidence in India shared by officials responsible for the making of public policy as well as by managers in the private sector that India was on its way to climbing up the growth trajectory in the same manner as China. The latter had gone from backwardness to becoming a global economic powerhouse. As one commentator wrote, it seemed that “the Indian century had arrived; growth rates stubbornly stuck at 3.5 per cent for decades were forgotten”. That seems a distant dream now. The government has revised the growth rate for 2009 to 7.1 per cent, the slowest in six years. Other analysts are even less confident. Citigroup expects the rate of growth in 2010 to be only 5.5 per cent, increasing to 6.2 per cent in 2011. This may appear to be satisfactory given growth rates in the half century after independence when India was stuck at what some Indian economists called the “Hindu rate of growth”. But there was an expectation of a fundamental change in the structure of the economy which would allow the latter to grow at rates achieved by China over a period of 25 years. In the three years before the current downturn, the Indian economy had grown at an annual average of close to nine per cent. This meant an increase in average per capita income of almost eight per cent a year. The large Indian middle class had begun to show signs of prosperity. This class will be seriously affected by the way the downturn is being felt in the economy. Modern industry has suffered the most followed by the sector of information technologies. These two sectors of the Indian economy along with modern health services were expected to take India towards sustained growth and modernisation. They were expected to help the Indians carve out a large slice for themselves in the global economy. Those ambitions have been checked. Indian industrial production fell by two per cent in December, the second monthly decline in the last quarter of 2008. Textiles and automobiles are the two most affected sub-sectors within the industry. Both had done well in recent years because of exports. India had been successful in carving out niches for itself in these two relatively crowded parts of the global economy. The IT sector has also been seriously affected. What is particularly worrying for India is the loss of jobs in the modern sector. More than half a million people were laid off in the final quarter of last year. The rate of job loss is expected to increase in the coming months. This is unfortunate for the long-term prospects of the economy. There was the expectation shared by policymakers as well as the academia that job creation in the economy’s modern sectors would relieve pressure on the countryside where, despite a relatively high rate of urbanisation, most Indians continue to live. This is the first time that India is experiencing a major downturn in the modern part of its economy accompanied by a loss of jobs. Unlike the situation in China where the people laid off by modern sectors are returning to the countryside, such back-migration is not likely to occur in India. Consequently, there will be greater pressure on the urban areas, in particular on the country’s major cities. This will further deteriorate the social situation in India’s large cities that was so vividly portrayed by the Oscar-winning movie Slumdog Millionaire. How is the government reacting to the worsening economic situation? Not unlike the circumstances that have dictated public policy response in Pakistan, the Indians also don’t have the fiscal elbow room that would justify the kind of stimulatory route taken by China. Beijing is relying on an economic stimulation programme valued at close to $600bn to revive the economy. New Delhi has taken some steps to pump public money into the economy but its efforts are seriously constrained by the large fiscal deficit that already cramps government activity. The government’s fiscal target for 2009 was an ambitious one. It had hoped to bring it down to 2.5 per cent of GDP. It is now expected to be 7.5 per cent; possibly higher. It could reach 9.5 per cent. Such an increase will have inflationary consequences. Inflation had climbed to 12 per cent in 2008 but was halved in recent months largely on account of the sharp decline in oil and other commodity prices. But a large fiscal deficit, if financed by borrowing from the central bank, would introduce another type of pressure on prices. One factor helps India make adjustments. This is also the case in Pakistan. Both countries resisted the pressure from the world at large to completely open up their economies. This advice was taken to some extent but the economies were not as exposed to the outside as is the case in East Asia. One result of this is that the full pressure of the negative side of globalisation has not been felt by these countries. The shocks delivered by the economic downturn in the United States, Europe and Japan have been felt but not to the extent of their impact on the more open economies of East Asia. Does this mean that once the current crisis has passed both India and Pakistan should selectively open their economies to outside influences? The answer to this question will come but later when the world gets fully engaged with analysing the causes and consequences of the crisis. This exercise is likely to begin with the meeting of the G20 group of countries scheduled to be held in London in early April.