The Hindu Business Line : Growth takes new direction

Fears of a general economic slowdown in the developed nations are reshaping two driving princiles of newly emerging economic growth models; the relative importance of exports over domestic markets and the minimalist role of governments in the growth process itself. As fears of the loss of export markets wash ashore in those emerging economies that have zoomed up the prosperity scale with record foreign exchange reserves, shifts are already evident in the way these export-d ependent economies are preparing to sustain that prosperity should the US economy contract. First, there is a shift in export markets.

Growth in China’s exports to the US dipped from 20.4 per cent in the first quarter 2007 to 12 per cent in the third while that to India and other developing nations grew 20 per cent. Developed country markets still contribute significant foreign exchange earnings but the new trend will accelerate, accompanied by an equally strong shift to domestic markets. According to The Economist, 95 per cent of China’s 11 per cent GDP growth was accounted for by domestic consumption. Despite a slower growth forecast of 9-10 per cent this year, analysts believe retail trade will jump 34 per cent over the next four years, a dramatic escalation over the 14 per cent witnessed in the seven years to 2007. In an uncanny parallel with the trends here, investment demand is growing faster than consumption demand across Asian emerging economies, with capital spends zooming 17 per cent last year. Significantly, those investments are not so much in the export sector as in infrastructure and construction, particularly in China. Alongside, governments are stepping in to boost purchasing power in many East Asian countries. In the Philippines and Thailand, investments in public works and health-care have been stepped up; Hong Kong is trimming taxes. Two factors other than recession fears in the West have contributed to this new wave of public money spends: predictions of lower growth forecasts this year and budget surpluses.

With inflation also on the rise, many emerging economies are loathe to reduce interest rates; fiscal stimulus seems more potent in that public investments create additional purchasing power among newer consumers. Against this backdrop, Mr Chidambaram’s last Budget could be his most critical in its focus on tax cuts and higher outlays for the social sector, all of which could release purchasing power and sustain consumption demand. Equally important, public utilities and social goods that enhance connectivity of larger sections to markets would also boost domestic access to goods and services. But most important, efficient delivery timetables are needed for such vital resources. That could become the government’s most memorable legacy.

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