August 28, 2011


- Trouble in the US economy will have its effect on India tooAshok Mitra

Times change; so do identities. In the not altogether distant past, ‘market’ used to mean the place where one did the day’s shopping, buying cereals, vegetables, eggs, fish, meat, provisions and suchlike. No longer. The market is now the share market. The media report, with religious regularity, hourly movements in the market, how prices — share prices — behaved in the morning session, how prices oscillated during the afternoon, where prices closed at the end of the day. With the increasing trend towards exclusive growth and command over the economy fast turning into a hegemony of the affluent, speculating in the market — buying and selling of shares — is currently the central concern of the government too. Market behaviour — whether share prices are moving up or down and by how much — is considered the barometer of the country’s economic health. Neither the government nor the media are unduly bothered about the daily trends in the prices of commodities that humble householders, straining to make ends meet, are avidly interested in, like prices of foodgrains. At most an index of consumer prices is released on a weekly basis.

This shift in market identity has led to a reversal in the perception of what is good or bad for it. In those ancient days, any increase in market prices was considered a bad thing, since it would cause hardship to the common man. With the stock exchanges appropriating the nomenclature of the market, the concept of a desirable development is transformed: if the market is buoyant and prices soar, cheers rent the air; gloom descends if prices dip.

When prices of food and other daily necessities rise steeply and the nation’s majority suffers, the government says it has no magic wand to control prices; the finance minister piously looks up to the weather god as in the colonial era. It is a different story when share prices crash, as they have done in the wake of the downgrading of the credit rating of the United States of America by Standard and Poor’s. Shares plummeted in Wall Street and, to borrow the Japanese phrase, the resulting shokku was felt worldwide. India could not remain unaffected. The prestigious index, the sensex, came down by several notches at one go. Speculators, blind with fear, called Standard and Poor’s dirty names. The country’s upper classes were told over the past two decades to accept as gospel truth that what was good for the share market was good for them and, ipso facto, good for the economy; and now, suddenly, this near-calamity. The authorities bestirred themselves with extraordinary rapidity. Reserve Bank of India officials and senior civil servants pleaded with investors not to panic: they were keeping a watch on the situation; the finance minister rushed to read out a solemn-to-the-occasion statement — India would sail through the crisis, our ‘fundamentals’ were strong enough to cope with temporary vicissitude of fortune.

These ‘fundamentals’ must be a mysterious category. The finance minister could not have been referring to the stagnation of agriculture or to the fact that close to one-third of our people are too poor to buy enough food for their body. Nor could he have in mind that other dubious achievement, the phenomenon of jobless growth. The rate of industrial growth — including growth in infrastructures — has of late slowed down. The undoubtedly marked increase in merchandise exports is not of much help since we continue to import more than we export. In only two areas the record is impressive: global demand for Indian softwares has kept growing at an exponential rate, and our foreign exchange holdings have touched a seemingly comfortable level.

The circumstances are nonetheless dicey. The immediate prospects for the American economy, the world’s largest, look gloomy. For the first time since the nightmarish 1930s, the US rate of unemployment has touched 10 per cent. President Barack Obama has lost to the Republican Congress in the fiscal battle, the Congress has agreed to raise a wee bit the ceiling on public debt on the condition that budgetary expenditure is drastically cut over the years. Keynesian measures to boost employment through public initiative is therefore an act of reckoning. The banking sector, yet to get out of the trauma of the sub-prime debacle, will be exceedingly reluctant to go on any expansionary binge. Its role, in any case, continues to be incorrigibly profit-centric. Given the state of the economy, the corporate bodies too are more than likely to keep pruning their investment plans. To add to the woes, average American consumers persist in their preference for foreign goods over home products on grounds of both price and quality: in a free enterprise system, clamping of any restrictions on imports is inconceivable. The Standard and Poor’s verdict has effected the coup de grĂ¢ce. Its message is brutally simple: the US is no longer a safe haven for investors. It will, therefore, be no surprise in case a good and proper recession sets in, leading to a shrinkage in the American economy. That would be grim tidings for many Asian countries, including India. Our exports of semi-manufactures and manufactures, raw materials and minerals are bound to decline. Of vastly greater significance would be the plummeting of software earnings, accompanied by a parallel contraction in remittances sent home by expatriate skilled and semiskilled workers.

For some never-say-die optimists, it need not be an entirely bleak picture. The American crisis, they will suggest, can, at least in the short run, lead to a substantial increase in our holdings of foreign exchange by courtesy of the genre known as international finance capital. To induce banks and corporations to keep the economy afloat, the Federal Reserve Board is under commitment to maintain the US prime rate of interest at near-zero level. This would persuade footloose capital to move out of the US and search alternative locations where the rate of return is not so abysmally low. There could be hardly any better choice to park their funds than India where the rate of interest offered ranges around 8 to 10 per cent. Foreign institutional investors are sure to flock in, don the role of big players in Indian bourses to gladden the heart of investors. Share prices would, in consequence, begin to stabilize — and even move up. Once the process gathers steam, everything would turn hunky-dory and the nation’s affluent set would get back their peace of mind.

But it all depends. The meat of the issue is how the American nation copes with the nitty-gritty of the emerging realities. A nagging spell of economic stagnation alongside a 10 per cent rate or more of unemployment is breeding ground for despair. Of equal concern is the country’s ever increasing balance of payments deficit; the Chinese authorities have been blunt but what they have said is true: rising US external indebtedness implies that the country is living on the charity of others.
These are all combustible material. The riots in England should leave some lessons behind. The jobless and under-privileged may for quite a while idly walk by shop windows displaying dazzling luscious jewellery, sophisticated electronic goods and other luxuries; but a weekend can arrive when they are no longer content with window-shopping; they decide on window-breaking and wild bouts of what the British prime minister calls vandalism. Is the US immune to a similar sort of development? A lot of emotions is pent up under the surface: deep disenchantment with the purposeless loss of American lives in the remote wilderness of Iraq and Afghanistan, resentment at the administration’s exertions to bail out the very banks and corporations that were primarily responsible for the crisis spawned in 2008, a feeling that foreigners are appropriating American jobs and the government is doing nothing about it, residual racial and ethnic tensions carried over from the past, anger at measures afoot to rob organized labour of trade union rights. Should social tranquillity be rudely disturbed, even if spasmodically and temporarily, the impact is capable of disequilibrating the economy to an extent where production plunges, finance capital loses its way and chaos takes over.Given the close interlink the Asian countries have developed with the US economy, this could be equally disastrous for them, including for India. That China would be a co-victim could provide zero solace.

The finance minister’s ‘fundamentals’ would go up in smoke once the turmoil in the US crosses a certain point. For one thing, the gushing flow of dollars that might swell over forcing exchange assets to lose their significance if, following the economic crash on the domestic front, the external value of the American dollar descends to inconceivably low levels. Our dollar holdings would then be rendered almost worthless. That would be an apt instance of inability to salt the earth because salt itself has lost its savour.

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