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Indian economy in sharp slowdown


Attacks on American-style capitalism at the United Nations meeting illustrated how US financial woes are prompting countries to question the American economic model which has dominated the world since World War II. How worried should we be? “India will feel the sting,” said Anirvan Banerji, 52, co-founder and director of research at the Economic Cycle Research Institute in New York, talks to Uttara Choudhury. Banerji is said to have inherited his mentor, world-renowned analyst Geoffrey Moore’s gift for reading leading indicators.

The $700 billion bailout plan had problems on Capitol Hill but is it possible to stabilise the markets without government intervention?
At this late stage of the game there really is no other way. However, the resistance this plan is facing is due to anger at what is seen as the prospect of a huge transfer of taxpayer dollars — nearly $9,000 per household — from ordinary Americans to some of the very firms on Wall Street who are seen as being responsible for the threat of a financial market meltdown.

Everyone is mesmerised by the shenanigans of the 800 pound gorilla represented by the financial markets, but what is ignored is the elephant in the room — the deepening recession — driving the gorilla crazy. While the bailout plan is being sold as something that will avert not only financial Armageddon but also recession, the reality is that the recession will continue, as will the home price downturn, regardless of the emergency action taken in Washington.

Are you calling a US recession?

We have had a mild US recession so far which is going to get worse. It started in early 2008 when industrial production and employment started to fall. The exact date will be clearer in a year when the dust settles and the final data become available. But as usual, people don’t realise the recession has begun until long after the fact. It will become more evident to economists next year. Most developed countries went into recession in the first half of 2008.

A growth forecast for India?

In India’s case the trend growth rate is so high that we are really not talking about a recession but a slowdown.

Instead of negative growth which marks a recession, we are talking about less positive growth — a slowdown. But according to our Indian leading index, India is headed into its worst slowdown in at least a decade.

Of course, we have ruled out full-blown recessions for India and China of the sort the major developed economies are experiencing.

What are the implications of being in denial about a recession and the prospects of US recovery?

Denial about a recession is dangerous because it makes for ill-timed policy.Being in denial about a recession disables that stitch in time which saves nine. That is what happened this year when US taxpayers got cheques of several hundred dollars from the government under a plan to stimulate the economy. Not at the beginning of 2008 when recession was beginning to take hold but when it was too late. The train left the station at the start of 2008. Now the recession will take its course.

This mother of all bailouts is aimed at not letting the credit system seize up which would make for a disastrous recession. But a depression is unlikely The unemployment rate in the US is currently 6 per cent and in the Great Depression it went over 25 per cent.

There are ‘automatic stabilisers’ to ensure the economy doesn’t go through what happened then. Unfortunately, our objective leading indices show no upturn. The US recession will not end this year.

Any fallout on India?

A large part of the Indian population has no connection with the global economy — that is likely to be a helpful buffer in this case. However, there will be repercussions. India’s exports will take a hit given that we are heading into the worst global recession since the 1980s. Both portfolio investment in the Indian financial markets and foreign direct investment can also be choked by rising risk aversion. Indian companies tapping international credit markets for financing will be hurt.

Does this signals a geopolitical power shift away from the US?

This has been symbolic of Washington’s failure to set an example about how well a free-market economy can function. It has bungled. It is no longer in a position to lecture anybody on how they should conduct their affairs or make its traditional calls for freer financial markets.

Having said that it is also true that the long-term fundamentals of this economy remain strong. People living outside the US may be indulging in schadenfreude and wishful thinking in discounting the power of the US economy.
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