Can India save the world ?
Now that I am over and done with my own personal “change management”, I can devote attention to some larger issues.
The suddenness and severity of the global meltdown has had a very deep financial and psychological impact everywhere in the world. With every TV channel, newspaper, magazine, radio, internet, coffee-break shop talk and perhaps even kitty party chatter hovering on the topic of state of economy, I dwell on this theme a little today. The post-mortem and dissection of what, why and how the global recession happened will be written about for a long time to come, in reams and reams of analysis by experts. I will only try to make some sense of ‘economy’ from a layman’s perspective.
Let me start with the most commonly used measurement of economy – the GDP. What exactly is this ‘be all, end all’ of today’s human existence? Without getting into the technical definition of GDP, it simply gives an indication of a nation’s performance in terms of its goods and services produced in a particular year. Economists make a great song and dance about this one statistic more than any other for a nation’s economic health, and very rightly so.
When the downturn struck somewhere in the middle of last year, much of the human race watched in horror as GDPs of every nation plunged into negative territory or took a sharp turn southwards. Thousands of businesses went bust, millions of jobs were lost, innumerable dreams were shattered and the world was seemingly trying to shut down – as if someone had pressed the ctrl+alt+del keys on the earth’s computer. Surprisingly, none of the most able clairvoyants, even Nobel laureates in Economists, predicted such a catastrophe. Clearly, this was no cyclical recession, but a fundamentally damaging financial tsunami.
Ordinary people like me were left wondering – what the heck went wrong ? Who started all this ? What have I done to deserve this ? When will all this end ?
The origins of this disaster were sown in the sub-prime home loan market of the world’s No. 1 economy – the United States of America. Compounded by fancy financial derivates called CDOs (collaterized debt obligations), the falling prices of US houses had a domino effect on the financial institutions across the world with devastating effects. High leverage propelled by excessive greed proved to be fatal for even some of the most revered names in the world of finance. It was so crazy that an entire nation – Iceland – froze and went bankrupt ! Soon, with so many casualties and blood on the street, nobody trusted anybody, and this led to another crisis – that of credit. Lenders simply stopped extending loans. Obviously, all businesses and industries felt the numbing pain of this sudden surgical strike. Now the economy – the GDP – of almost all countries was running high temperature, if not already in the ICU.
The governments of the world, bewildered though they were of this unexpected crisis, quickly swung into action to resuscitate their beleaguered GDPs. They increased government spending, bailed out several bankrupt companies with the taxpayer’s money and reduced interest rates to unprecedented levels in a series of quick actions, aimed at ‘stimulating’ the morbid economy. But the rot was so deep that it is unclear to this day as to when and how the world economy will limp back to normal.
In the maddening din of the wild and extreme calamities, some voices started to rise saying that two countries held the key to the economic revival of the world – China and India. With 37% of the globe’s population between the two, and their GDPs growing at a scorching pace is the last few years, this seemed to be a believable and probable theory. But I found this funny in a somewhat dark sense of way. On the one hand, India and China were suffering and paying for the sins that the developed world had committed, and on the other the same perpetrators of the crime looked to these two populous nations to redeem them from their predicament.
Anyways, let us have a close look at the conjecture that India and China indeed have the formula to heal the crippled world. I will take India as a study object, and the conclusions can be extrapolated to China as well.
The conundrum called India is a hugely diverse sub-continent of 1.2 billion people. The population is nearly 4 times that of USA, the world’s numero uno economic superpower. With a nominal GDP of $1.21 trillion, India ranks 12th in the world order. However, on Purchasing Power Parity (PPP) basis, India has a GDP of $3.29 trillion and moves up several notches to the 4th place of the world economy rankings. Despite the global meltdown, India is still growing at an acceptable rate, albeit at a lower clip. All this augurs well for the ‘India can save the world’ argument.
But the US economy at a nominal (and PPP) GDP of $14.26 trillion is way too huge as compared to Mera Bharat Mahaan. With exports at only 15% of the GDP (China’s exports are 32% of its GDP), India has a miniscule impact on the world economy. Add to this the trade deficit and the burgeoning fiscal deficit, India will have its own problems to contend with, forget about trying to bail someone else out of its troubles. There is also an impending threat of drought in most parts of the country, threatening to stamp out the green shoots in the economic landscape.
In the best case scenario, India will scale back to 8-9% GDP growth rate in the next 2-3 years, thanks largely to its domestic consumption economy. In the worst case, inflation and interest rate will rise, consumer spending will fall, credit will be hard to come by, fresh investments will be scarce and the GDP will be thrown back to the Hindu rate of growth.
My take on the ‘Savior India’ hypothesis is therefore that India does not have a magic potion to inject life back to the world’s shattered economy. Only one nation – and let there be no doubts on this – USA holds the answer to the world’s economic woes. The giant has to get up on its own two feet and trudge back to what it knows best – make money. Of course, it needs to be supported by economic revivals in the Eurozone and Japan. As for India and China, let them take care of themselves first, and they will certainly emerge as major drivers of the world economic cogwheel.
Having said that, I am confident that US has put its worst behind it and there will only be good news from hereon. I only hope America has learnt its lessons from the excessive greed, regulatory failures and financial mis-adventures which plunged the entire world into a never-before crisis.
Endpiece : “If you build that foundation, both the moral and the ethical foundation, as well as the business foundation, and the experience foundation, then the building won't crumble.”- Henry Kravis
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