The Vicissitudes of the Year Past: Relief not in Sight Anytime Soon

The Vicissitudes of the Year Past: Relief not in Sight Anytime Soon
Arun Kumar
CESP, SSS, JNU.
The Tribune, January 1, 2009.
The year 2008 started on a high with the economy doing well, stock markets at a historic high, real estate markets booming, industrial growth running at upwards of 10 per cent and inflation at low rates. The finance minister boasted that the macro economic fundamentals are good and the Eleventh plan target of 9 per cent average growth rate viable. There was little inkling that policy making circles understood that a deep economic downturn had set in India and the entire world.
Contrasting this rosy picture, the year is closing with wide spread reports of declining employment, stock markets down by 50% to the levels of 2006, declining real estate markets, industrial growth and exports showing negative growth and many components of the services sector declining rather than growing. This has happened despite the unprecedented interventions by the government and the Reserve Bank – the infusion of massive liquidity, huge supplementary budget and the announcement of the first package of fiscal stimulus soon to be followed by a second one. FRBM has been given a quiet burial.
The year also saw much turmoil due to a rapid acceleration of inflation from its lows in January to the highs in the middle and now to a rapid decline in the closing weeks of the year. It seemed that the government had lost control because at one point the government admitted that it could do little to keep inflation in check by pleading that it was stable and not rising further.
Internationally, the prices of crude oil which had reached a peak of around $150 per barrel have sharply fallen to around $40 in spite of the threatened cut in production by the oil producers. In fact, many, like, Goldman Sachs had predicted that the price of crude would be around $200 by the end of 2008. Similarly, given the blistering pace of the rise in the BSE experts predicted that it would touch 30,000 - three times the level ruling currently. All this calls into question the expertise of the so called experts and policy makers.
The year began with policy makers and experts suggesting a decoupling between the Asian and the US and European economies. They suggested that the rapidly growing economies of Asia will provide the boost to the advanced economies so that there would be a soft landing for the world. This was based more on hope and hype rather than on analysis (As argued in these columns on February 6, 2008). These economies were already at their peak growth rates and could not double them which was required to compensate for a decline in the rates of growth in the OECD economies. Further, since China is heavily dependent on exports to these economies and India is much more open than earlier, if anything, their rates of growth were bound to fall. These two economies could not move in a direction opposite to that of the bigger economies, as events have borne out. Clearly, all along the policy makers and experts have been hoodwinking by denying reality. They also fooled themselves and did not take timely steps so that the situation became worse than it should have and now everyone is paying for it.
The rich have lost a lot of paper wealth on their financial assets where much of their savings were invested. These people also had substantial amount of their black wealth stashed away abroad because this was also invested in financial instruments. These people were also operating real, nuts and bolts companies or offices and due to the slow down, these are also in trouble. The contagion has spread from the financial markets to the real economy.
All this has impacted the middle classes who have linkages in the organized sectors. Many of them are in the process of losing jobs and their children are not getting the good jobs they expected. Further, a large part of their savings in financial assets – stocks, real estate, mutual funds, etc. - have been wiped out. In recent times they were lured by stories of high returns and greed won over caution. Many NRIs will possibly return as they lose jobs abroad and add to the employment pressures. Remittances that supported many families are likely to dry up leaving families in trouble. Public sector employees with safe employment will have a good time as prices fall.
Some argue that the poor will not be hit by the current crisis because they are marginal to the market and especially the financial markets. This is fallacious because the marginal are coercively linked to the markets in a one way relationship. While they derived little benefit from the high but marginalizing growth they will suffer from the decline. Even if they lose a few rupees a day of income, it will be calamitous for them since they are at the edge of survival.
As unemployment builds up the world over, wages will fall and disguised unemployment will rise. Price fall will help but not enough. Employers in the unorganized sectors and the rich farmers who will be squeezed by the crisis will put the squeeze downwards and affect adversely the incomes of the poor. Government programmes like rural employment schemes can help the poor but corruption moderates its effect.
Agriculture in India has been increasingly export oriented and there has been a shift towards commercial crops and high cost agriculture. The markets for these commodities have declined sharply and the slide can continue unless prices are sharply lowered but then the surplus farmers will lose out. The traders will put the squeeze downwards and the farmers will do the same to the landless workers.
In India, big and medium sized firms buy from the smaller units in the unorganized sectors. As these units face decline in demand, they will be forced to shut partially or wholly , reduce shifts and cut prices which is possible only if they squeeze either the wages or the smaller ancillary suppliers (possibly both) who in turn will squeeze their workers. Thus, wages of workers are likely to decline all around and their employment curtailed.
Governments all over the world have put together huge packages of interventions to prevent their financial sectors from collapsing but done relatively for the real economy and the poor. This has certainly slowed the decline but it is still continuing. The problem this time is different than in 1929 and much deeper, linked to the basics of the world economic system. Merely trying to reflate the economies without any basic change will not work.
In India, the NEP launched in 1991 depended on the proper functioning of the global financial system but because this is now collapsing, the success of NEP is in doubt. While the marginalized sections were suffering and continue to suffer, now the beneficiaries of the NEP are being grievously hurt. In the changed global scenario, NEP need a rethink.
Many companies are close to bankruptcy if not bankrupt, public does not trust the present financial system so it has ground to a halt and due to extreme uncertainty, everyone wishes to remain liquid rather than invest. The crisis has been building from 2006 without our recognizing it and we are still groping for solutions because these have to be out of box and this will take time. If the social and political situation deteriorates with rising unemployment and destitution, then even big economic interventions will not succeed and governments will become helpless. While 2008 is closing on a difficult note, 2009 appears to be heading for deeper trouble.