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Global Slowdown 2013/4 & India

By : Amit Bhushan 25th April 2013

When the economy was in distress, the consumer nations of West responded by depressing interest

rates and monetizing bad debt which fueled their consumption binge further and led to financing of not

so viable projects in name of job creation. Producers in Asia such as China responded by investment in

infrastructure which boosted capability to produce goods and services as well as led to a bit increase

(compared to the production capacity) in the domestic consumption by population within these

economies. The other major economies like Japan got squeezed and have responded by devaluing their

currency and so did India. Globally, most legislators had a trained their eye and scissors on fisc and this

too has not been helpful as the fisc is yet to be fixed for most countries while yet again a slowdown is

to be managed.

Now the plan to pull their respective economies out of recession has hit its limitation. The producers

will have to press domestic consumption accelerator by boosting super charged growth in creation and

consumption of services through liberalization and further rise of domestic wages so that some of the

workers can be weaned away and excess goods can be consumed domestically. While consumer nations

in the West have raise savings, possibly by increasing interest rates to fight a deterioration of balance

sheets of Financial Services on the back of failing repayments from unviable projects financed earlier.

They would also need to improve 'actual' repayment of burgeoning credit from borrowers which have

already reached unsustainable levels to restore confidence of investors in these institutions.

The falling Commodity prices are a strong signal that the time to push accelerator in right direction has

arrived and is knocking at the doors of governments and central bankers. The Commodities have been

falling (against all major currencies) in spite of easy credit in West and devaluation of Yen by Japan.

Principally it a signal of weakening of consumption probably due to pusillanimous Banks not supporting

credit which could be basis experience in the recent past. This is likely to affect ongoing and upcoming

projects to boost production of commodities/minerals in developing economies and job losses across

the board. Though there is very high probability that much of the fall of commodity prices is a result of

deleveraging by Hedges rather than an actual reduction in consumption, however the fall of

commodities is broad based & includes commodities like steel, aluminum, copper, energy etc. which

cannot be basis Hedges alone.

Most of the indicators in China as well as West have not fully reflected this slowdown yet, possibly

because the industry has not anticipated it yet and easy credit has allowed inventory built up of

manufactures to an unprecedented level. The global book keepers such as IMF and World Bank have cut

down global growth including that of trade is one of the pointers of things to come. A clearer picture

might emerge in next 3-6 months. Usually such slowdowns wait for some event to reveal themselves so

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that the event can be blamed to kick start slowdown & to provide suitable direction for a corrective

action and such an event has eluded economics as of yet.

India has a chance to emerge as a place of temporary tranquil with its Current Account deficit expected

to come down on account of commodity imports becoming cheaper and with its opportunity to reduce

interest rates to enhance domestic investment and consumption. However it will continue to facechallenges for its exports especially those of engineering projects and goods though they may not be a

major part of the overall economy as of yet. It would continue to push structural reforms avoiding

political leniency, lethargy & inertia to seep into its government and build a foundation for domestic

manufacturing that can compete globally for generic & innovative products & services. Over the

medium to long run, its IT industry may need to progressively reduce dependency on West and focus on

products and services other developing countries basis the capabilities and experience that has been

achieved. Its ITeS industries will need to identify pockets where off shoring adds up a significant value

not only in terms of costs alone but in overall transformation of user experience & satisfaction. India

will have to achieve this in next 4- years by which time most of the large economies balance themselves

out so as to not miss the Bus to partner global economies as a significant player. The recession in2008/9 gave it an opportunity to scratch the surface through its participation in G-20, however its

conduct in through this continuing difficult period to manage its domestic affairs appropriately and to

raise its game will allow it to earn its space in the comity of nations.