Brace for the worst

There is an ill wind sweeping in from Europe. The wind brings with it warning signals that the world economy will go through a rough patch. Economic activity worldwide is shrinking, and there is no reason for India to be unaffected. The country's growth during the past few years has been integrally linked to the world's growing demand for Indian products on the one hand, and, on the other, to a growing perception that India is the place to be in for funds waiting to be invested. All this is in for a change.

That international economic activity is slowing down is firmly indicated by the gloomy growth projections made by the Organisation for Economic Cooperation and Development, the World Bank and the IMF. For example, the OECD's growth projections for the Euro Zone predict the onset of a recession, the organisation's chief economist warning of “contagion in the euro area”.

The World Bank has cut the 2012 growth forecast for China to 8.2 per cent from 8.4 per cent and has advised Beijing to rely more on an increase in domestic consumption to keep the economic engine running. In a recent economic update for East Asia and the Pacific region, the Bank said “a slowdown in China would drag growth in emerging East Asian nations to two-year lows this year”, warning that the European debt crisis “could inflict even bigger damage if it worsened”.

Epicentre of danger

In January, the IMF cut its global growth estimate for 2012 to 3.2 per cent from 4 per cent, again making the European crisis largely responsible for the slowdown. Generally, the fund expects Europe to face “a mild recession in 2012, stemming from the debt crisis hampering growth in the 17-nation Euro Zone”. The Fund said that the “near-term outlook has noticeably deteriorated,” with global recovery being “threatened by intensifying strains in the euro area and fragilities elsewhere.”

More pointedly, the Fund's Economic Counsellor, Mr Olivier Blanchard, was quoted as saying that “the world recovery, which was weak in the first place, is in danger of stalling. The epicentre of the danger is Europe, but the rest of the world is increasingly affected.” The main problem, according to him, was to isolate the European economic downturn from affecting the rest of the world, which of course is easier said than done.

Focussing on Europe, the IMF Managing Director, Ms Christine Lagarde, said in Berlin sometime back: “We need a larger firewall. Without it, countries like Italy and Spain that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs.”

Countering the downturn

As is clear from its economic performance, India has been caught up in this vortex of economic slippage, with growth projections being reduced by all and sundry. There is little doubt that the annual growth figure for the current year will be around 6.5 per cent, or even less, depending on how effectively the Government can counter the impact of the international downturn.

Among other things, the common man will have to face severe hardship in that heavily subsidised items of general consumption such as cooking gas and diesel (which is an important input for the general price level) will become costlier. At least they should. If they do not, India is headed for deep economic trouble in the years ahead.

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