No more SHORTCUTS for India

As always, workers have to bear the brunt of any adjustment and restructuring by business in a period of recession. That is how capitalism works.

Aseem Srivastava Delhi

History teaches us that men and nations behave wisely once they have exhausted all other alternatives - Abba Eban

That the India story is over is now widely acknowledged even within the establishment. But just how deep the forthcoming recession is, is becoming clearer with each passing week. Part of the problem lies with the fact that the definition of recession is itself problematic. In the rich countries,
two successive quarters of negative economic growth is called "recession". Certainly, by this yardstick, neither India nor China are in recession at the moment, even if their growth rates have been reduced by several percentage points each. (It would be absolutely catastrophic not just for them but for the world itself if these two countries were to go into recession - by the Western definition - at any point of time!)

However, for developing economies, such a definition cannot suffice. It is a lot easier for poorer nations to grow fast. So, deceleration in the rate of growth should itself be a cause of concern for policy-makers. And it is, despite repeated official denials by our leaders. Their anxieties are further aggravated by the fact that India is increasingly more integrated with the world economy. Foreign trade was a little over one-fifth of GDP in 1997-98. Ten years on it is well over a third. When foreign capital flows (together with trade) are taken into reckoning the shift during the last decade has been even more dramatic. The rise is from 46 per cent to 117 per cent of GDP. All this has huge implications for the country as the rich world sinks into a yawning abyss of economic difficulties, threatening to take the world down with it. The recession has exposed underlying structural weaknesses in
the Indian economy is fast becoming clear. All along, our leaders and the policy elites have been insisting that even if the (financial) "markets" are falling, the "fundamentals" of the economy are strong. So, it is suggested, it is a matter of time before fortunes bounce back. But how strong are the fundamentals actually?

Note that it is not just the stock market (its index, the Sensex, having lost more than half its value since the beginning of this year) which has fallen dramatically. Industrial output (presumably one of the key "fundamentals" of the economy) has declined in India for the first time since 1993. This has shocked the business establishment, no less than the government. The Index of industrial production fell by 0.4 per cent in October 2008, compared to a year ago. (Economists were predicting a growth of 2.1 per cent.) Within that, manufacturing declined by 1.2 per cent. It is strange consolation indeed when agriculture - the hitherto castigated laggard of the economy - is growing faster than industry!

Is the flagship of the economy, the service sector, doing any better?

The export end of it - IT, IteS, BPO and others - are suffering big slowdowns as a result of the collapse of consumer demand and fall in outsourcing in the West. But other service sector areas - travel, tourism, hospitality, retail, real estate, to name the most prominent ones - have also taken significant hits. Consumers, both in India and abroad, have postponed decisions to buy travel deals as much as houses. This despite favourable terms from the sellers in a very tight credit environment.