An “economic hurricane” is sweeping the world, with devastating effects for all countries, rich and poor alike. The only way to prevent the most serious recession of the last 75 years is for all nations to act as one. Within the UK few would deviate from this analysis. But here in India things feel different. Gordon Brown’s “global economic hurricane” feels rather more like a stiff breeze.
India is experiencing economic turbulence. To suggest otherwise would be misleading. Some estimate that 10 million jobs have been lost here as a result of global economic developments. Industrial output has slumped, and ominously, the most recent figures are the worst. In December, manufacturing output, for example, fell by 2.5 per cent year on year – a particularly negative trend when one considers that it grew by 8.6 per cent in the previous 12 months.
The threats to economic progress are such that the government has had to act, putting a range of stimulus measures in place. Excise duty has been cut, interest rates have been brought down and spending increased, particularly on infrastructure.
However, India is not as violently affected as other countries. The language used to discuss the economy is strikingly different that used in the UK. Government ministers go beyond identifying ‘green shoots’ and are predicting dates – June at the latest – by which point the worst is expected to be over. The finance secretary has declared “there is room for optimism” and prominent business people have suggested that the crisis will help them to boost efficiency and productivity. Most striking, in the last mini-budget before the election, the government declined to introduce a major new stimulus package. This despite the obvious political, as well as economic, advantages to boosting spending. “Constitutional propriety” instead won the day.
This distinct lack of panic feels appropriate, given India’s economic performance. Inflation is down, financial indicators such as corporate bond rates appear to be correcting themselves, and car sales are almost back to 2007 levels – in striking contrast with other countries and after a sales freefall of nearly 20 per cent in late 2008.
Moreover, the negative trends which India is experiencing can be set in context. A rise of unemployment by 10 million is huge in absolute terms (and of concern under any terms), but against the size of India’s labour force and the stock of existing unemployment it isn’t as massive as it might seem. Moreover, a recent survey found that most Indian companies are still hiring, promoting staff and awarding pay rises. And while industrial production is down, key analysts attribute this to the selling off of inventories, and expect it to pick up again fairly soon. All this then adds up to expected growth in 2008-09 of around seven per cent. This is lower than the nine per cent plus that India has experienced since 2005–06, but it is not disastrous.
So why is India doing relatively better than other countries? The lower exposure of India’s financial sector to the sub-prime crisis appears to have helped. So too does India’s economic structure, which is less heavily export driven than economies such as China, with a large domestic middle class market. Also, many in India still haven’t really joined the global economy. Many of India’s villages still aren’t connected by road, meaning their people live a broadly subsistence existence, mostly growing their own food and meeting their own needs as best they can. To some extent, what you don’t join can’t hurt you. Moreover, many in India feel that they are relatively well placed to benefit from cost cutting initiatives that companies across the globe are undertaking in response to a squeeze on profits. Add to this a government fiscal position which is good enough to boost spending during the downturn, and India’s performance starts to make sense.
But what are the global implications of India’s relative economic strength? First, it makes creating a consensus for ‘acting as one’ at the G20 London summit more difficult. The UK government’s premise for G20 action is that everyone is in the same boat. It isn’t clear this is the case. But second and more important, the more countries the economic hurricane only grazes the better, for their own citizens, but also for the global economy, and therefore, for all of us.