The Hindu Business Line : The Washington message

After returning to New Delhi following the Washington meeting of the G-20 on the ongoing meltdown in the international economy, the Prime Minister said that the message at the gathering was that “the worst had not still been seen”. This, in fact, appears to be the most important outcome of the conference, because it tells the world that if it has been bad till now, the situation will be worse in the weeks and months ahead.

What this means on the ground, both for the rich and the poor alike, is that the belt-tightening steps, which have already been taken, will have to be continued and more such measures will have to be taken to tide over the developing crisis.

Indeed, there is statistical evidence that the future will be even worse than the present, in the figures that are being talked about regarding the performance of the US economy. A Washington report in Tuesday’s papers stated that the US economy would “contract at a faster pace in the fourth quarter” compared to the dismal showing in the two preceding quarters, “extending the decline into early 2009 as high unemployment crimps consumer-spending”. What this essentially means is that the world is in the grip of a recession, which has been statistically confirmed, one which has affected the leading economies, including Germany and Japan.

Providing a cushion

If this is the international setting, Dr Manmohan Singh and his team have their hands full in trying to control the impact on the Indian economy, which, because of its growing clout in the international marketplace, has become evenmore closely integrated with the world economic system than in the past.

The impact, as everyone knows, is two-fold. The first, at the level of supply of reasonably priced funds internally and, second, at the level of external demand for the products of domestic industry. This is why the point has been made that the palliative has to be applied through both fiscal and monetary routes, targeting the competitiveness of goods through the tax structure and regulating the price and availability of funds through interest rates and other banking instruments, respectively.

What is certain is that it will take some quarters for the recession to work its way through the West and Japan, a period during which the growth rate in India will have to be shored up to the best of New Delhi’s ability (complicating the process is a possible change in Government at the Centre during the period). There is another, and more worrying point as far as the domestic economy is concerned, which is that during this period companies will have no option but to prune their workforce not only to reduce costs but also to match manpower requirements with a declining production trend. Indeed, the process has already begun with a large number of small players announcing workforce-cuts, with the larger players taking steps to trim flab in expenses.

Outlook bleak

The immediate economic future for the world is, therefore, bleak. Profits will be down as well as employment. Not surprisingly, the latest GDP estimates for the national economy have been put at below seven per cent, which will probably be lowered even further with time. The drop in the inflation rate is actually a sign of an economy slowing down, a fall in demand colouring the entire scenario. In his “General Theory” Keynes had suggested that the authorities should start digging holes in the ground to pump up demand. Dr Manmohan Singh should plug the holes in the economy instead, if we are to prepare for a stronger economic future once the present nightmare ends.

RANABIR RAY CHOUDHURY