Living through recession

Chacko Jose

The global economic recession has taken its toll on the Indian economy. The economic growth rate which was above 8 percent, for a consecutive period of 3 years since 2006, suddenly fell to an average of 5.5 percent. The decoupling, the economists predicted did not in fact happen. But, depression when it came to India started and spread in a pattern of its own. While in advanced countries the contagion started in the financial sector and spread to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn is cumulatively pushing down the real sector. With global growth slowing and financial markets experiencing a downturn, the fallout for India is a matter of concern. With growing signs of slowdown across sectors, persisting high inflation, and continuing government deficit, India's economic outlook for 2011-12 has turned distinctly gloomy. According to experts, exports of readymade garments, leather, gems and jewellery, in particular, are expected to be affected. If there is a second recession, it could also have an adverse impact on the IT industry.

Moreover, with inflation persisting at unacceptably high levels for a prolonged period, the Reserve Bank of India has decided to continue with its aggressive monetary policy stance even at the risk of sacrificing some growth in the short run. India's economic growth has decelerated sharply this year. The latest data released by the Central Statistical Organisation points out that the Gross Domestic Product growth during the fourth quarter of the fiscal 2010-11 declined to 7.8 per cent - the slowest in five quarters - against 9.4 per cent in the corresponding quarter of the previous year.

There has been a significant slowdown in new investments and gross fixed capital formation during 2011, and the outlook for the current fiscal year appears all the more uncertain as companies have been postponing their investment decisions. Industrial output slumped into negative territory in October, raising fears of overall slowdown in the economy. Ongoing slowdown in United States may hamper projects as companies may spend less on information technology. Presently United States is the Indian software industry's largest market. Indian outsourcing companies have been contributing a lot to the country's economy through huge exports earnings. Official   sources     suggest     that   there   has   already   been   a sharp   fall   in   employment   in   the   export-oriented   sectors like   textiles   and garments   and   gems   and   jewellery, and even in industries catering more to the domestic market like metal products, automobiles and construction. Many newly unemployed are migrant workers, often short-term migrants with casual contracts.

For a time we believed that India overcame much of the fallout of depression. We believed that our financial sector was so strong and the RBI monitoring so methodical that we are going to escape lightly. It took some time for us to accept the fact that there has occurred a slowdown. And the slowdown is continuing. Actually, we have not recovered completely from recession. Before a full recovery could be effected, there are threats to investor confidence. The built in status of corruption and civil society resistance to it and the ensuing problems even in the smooth functioning of the parliament is attracting unfavourable international attention and this is undermining investor confidence.

     But the Government of India seems to be confident that matters are under control. ‘Our fundamentals are strong’ is a refrain that we often hear. RBI, Finance Ministry and concerned authorities are monitoring the situation and are confident that things are alright. The problem is that we have a mere fall out of global problems. But is more globalization the answer to the problem of globalization. Foreign Direct Investment in retail trade seems to be the answer that the authorities have in mind!

   The rational Indian has begun to ask questions. What is happening to the rupee? The external value of the rupee has reached an all time low and we wonder why RBI is not interfering as it used to do. The investor confidence is so low that stock market recovery is sporadic. At the ground level, we face a still high food inflation, a falling industrial growth rate, falling export revenue especially deceleration in software exports revenue. Concern that slowing growth at home, gloomy global outlook with Europe in crisis, and the US economy still sluggish; Indian leaders emphasize the need for taking decisive steps. The global scenario is not likely to change much in the near future. Economists fear that there is a fifty- fifty chance of a second recession in the US. All the distressed assets the banks wanted to offload with government help is out there vitiating the asset position of banks. Rating down of sovereign debt is another factor which will impact investor confidence. When trouble starts, the US has a history of reducing outsourcing to India as if that will solve their unemployment problem.

The global recession has made its impact on the Indian economy leading to multicrore loss in business and export orders, tens of thousands of job losses, especially in key sectors like the IT, automobiles, industry and export-oriented firms. Indian economy cannot remain isolated from the global developments. India is paying the price of globalization.