The Hindu Business Line : Is India an island economy?

The basic message must be got across to the people that India cannot shake off the constricting effects of the international economic crisis by constantly referring to the 7 per cent growth rate expected for this year.

The Finance Minister, Mr P. Chidambaram, has reiterated that the Indian economy is strong enough to weather the global financial storm.

Ranabir Ray Choudhury

The Finance Minister, Mr P. Chidambaram, has done exceedingly well in reminding everyone that when an economy grows at the rate of 7 or 7.5 per cent a year there is no question of unemployment increasing and that, therefore, any forecast of jobs being lost because of the current problems cannot but be misleading. And why only jobs? Even reports on a reduction in pay and the cutting down of frills enjoyed by company employees would be wrong because the Indian economy is st rong enough to weather the storm currently raging in the world economy and emerge from it unscathed.

The Minister is, of course, always right. This apart, he also has the job of ‘injecting’ reassurance into the national economy so that all players, big and small alike, are not overly affected by what they see on TV and read in the papers about the crisis gripping international finance and the real economy. Just as with the stock market, expectations play an important role in the taking of investment decisions and handling foreign currency transactions and, sometimes, when the players act in concert, albeit discretely, basing their actions on gloomy forecasts, what they do effectively, though unknowingly, is to worsen the problem enmeshing them.

It is, therefore, the job of the Finance Minister — in fact, all Ministers for that matter and other important economic functionaries in the national firmament as well — to focus attention on the country’s economic strengths at a time like this, for instance, underscoring the point that “India is a domestic consumption and investment-driven market where the contribution of exports to growth is not as big as in China.” This specific point was made, and sensibly too, by the Finance Minister, the inference being that the country should not be unduly worried by the talk of a strong recession gripping the developed economies, which would necessarily affect their domestic demand scenario and thereby hurt our exports.

The exports scenario

Even so, there is bound to be some impact on the national economy if exports are hit badly, if for no other reason than the fact that the export-GDP ratio has shot up appreciably over the past few years, exports accounting for more than a fifth of the GDP as of 2007. This apart, in recent times (before the present crisis erupted) the export sector has been doing well despite a rapidly appreciating rupee making Indian products costlier than before in the world market. It was in these circumstances that the 2007-08 export target of $160 billion was exceeded by the sector thus indicating that both export marketing and production efficiency was making its mark in the world market. Clearly, a slowdown in such a sector cannot be the best thing to happen to the national economy at this juncture, not to say anything about attaining the $200-billion target set for the current year.

The Finance Minister has reiterated that the Indian economy, growing at 7 per cent plus, is a ‘job-creating economy’ and not a job-destroying one, clearly implying that the reforms being introduced in the economy are basically employment-generating and not the other way round, as maintained by those who are against the reforms policy of the UPA Government.

Without going into the jobs aspect of the reforms policy, it is safe to say that if the export sector is hit by the present crisis, employment will also be hit. If the Finance Minister is correct in his view that even if the export sector is hit the overall jobs scenario will not be overly affected, what it means is that growth in the other sectors will amply compensate for the temporary export drawback. This is the big challenge facing the Manmohan Singh Government in its closing months in office. As it is, the growth rate has been reduced, which in fact is the biggest admission on the part of the authorities that the Indian economy is not an island unto itself.

It is in fact axiomatic that if the Indian economy is being seen by other world players to be playing an increasingly important role in the international economy, then its links with the world generally are growing.

When this happens, an economy cannot remain an ‘island’, especially when a full-blown economic crisis is turning everything upside down. What this means is that, whatever New Delhi says to reassure people at home, the impact on the national economy is clearly very much there, and there is no way of escaping from the destabilising effects of the crisis.

Awareness of impact

The next Lok Sabha elections are round the corner, and it is expected that the ruling regime will pull out every stop to convince the electorate that, despite the onset of a worldwide recession, the Indian economy has been maintained on an even keel by the superior ability of the economic managers of the UPA, led by the Prime Minister himself.

This is a legitimate target to set for politicians who perhaps have a lurking suspicion that they may have to sit in the Opposition benches in parliament in the next House. Having said this, the point must also be made that, shorn of the political veneer, the basic message must be got across to the people that India cannot shake off the constricting effects of the international economic crisis by constantly referring to the 7 per cent growth rate expected for the current year.

Dollars are continuing to flow out of the domestic economy; the rupee is plumbing the depths; companies are finding it difficult to access the funds market for their working capital requirements as also capital expenditure; and production in a number of key areas has been showing a declining trend because of a lack of demand.

As yet no light can be seen at the end of the tunnel, which may turn out to be longer than is being publicly conveyed by the authorities concerned. But then we are in the middle — or, who knows, still at the beginning — of an economic crisis that is being described as the worst since the Great Depression, and it would be in the fitness of things that people are made aware of the need to bring out the best in the national economy to tide over the difficult times ahead.

The focus now should be on the G-20 meeting to be held later this month where a concrete course of action should be charted for individual players to counter the cumulative pressure for a reduction of economic activity worldwide.

Come to think of it, the current crisis could have a great spin-off if the forthcoming conference could effectively sow the seeds of a new Bretton Woods.

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