Signs of an impending global recession grow by the day. Growth has been negative in Japan in the recent past, while it is declining in Europe with Greece, Italy and Ireland nearing crisis. China too is faltering. The United States is on a high growth path, but that only underscores the problems in the rest of the developed world.
Global economic growth was driven by technological innovations in the twentieth century–mostly in the US. The invention of the automobile, missile launchers, jet airplane and the internet led to the creation of new areas of economic activities. The stream of new technologies did not keep up though and the US fell on hard times. It did not have new products that could be sold at high prices. Its share in the world economy has declined to about 25 per cent today. The US economy slowed down in 2003-04. The US Central Bank, The Fed, loosened its purse strings and encouraged people to borrow to buy homes. The borrowers, however, were not able to repay the debt since the US companies were not able to ride on new technologies. The crisis of 2008 was triggered by this inability of the borrowers to repay the debt.
This was followed by the Fed bringing in a series of stimulus packages. The US economy continued to grow on the basis of these artificially induced consumer demands. But income cannot be generated by printing notes. The underlying US economy remained weak. Now that the Fed has started withdrawing the stimulus package, we have a global slowdown on our hands.
‘Fracking’ or production of shale oil is the new technology today. The US is producing about five per cent of the global supply of oil from this source now. It has led to an increase in global supply of oil. But fracking has not generated a new stream of economic activity like the automobile. It has only led to increase in supply of oil in the global market. The US consumer has got no new job opportunities from shale oil. The US stock markets are buoyant because corporations are making profits, but the common man is in trouble. The US demand for imported goods is down. China, Japan and the EU are facing the brunt of this.
The spreading of the global slowdown has got foreign investors jittery. They want to come back to the safe haven of New York. The tapering of the stimulus in the US has led to an increase in interest rates here and provided another incentive to bring back the money. The US is benefiting from the return of foreign investments and also the increased availability of shale oil. It is therefore stable. China, the EU and Japan are in trouble because of the slowing of exports to the US and the exit of foreign investors. They are benefiting from the lower price of oil, but this benefit is small compared to the loss of exports and capital to the US. Proof of this is the declining rate of growth in China and deepening crisis in Greece, Italy and Ireland. Russia, Venezuela, Iran and other oil-exporting countries, needless to say, are at the receiving end. They are seeing their oil incomes evaporate into thin air and also helplessly watching foreign capital flee their shores.
India is better placed than most major economies on both fronts. The share of exports in our economy, thanks to the resistance by the Left parties and the Swadeshi Jagran Manch, is low. Our dependence on foreign investment, despite the best efforts of Manmohan Singh and Narendra Modi, is also less. So the loss from dwindling exports and fleeing foreign investors will be less than China’s. The gains from cheaper oil, on the other hand, will be large. Therefore, India will be able to withstand the emerging crisis reasonably well.
Modi must resist the foreign investment focus being pushed by his bureaucrats and look inwards both for investment and markets. India is a rich country supplying capital to the west. Modi must make it attractive for Indians to invest their money in India. Indian businesses should be encouraged to produce goods for consumption by the people of India, instead of producing them for consumption by the Americans. Modi must ‘look inward’ to face the impending crisis.
The writer was formerly Professor of Economics, IIM Bengaluru
