Recession all around

As Barack Obama swept the us presidential elections on November 4 on the back of popular disenchantment with President George W. Bush’s economic policies, more bad news trickled in. The US unemployment rate soared to a 14-year high of 6.5 per cent in October. Almost 240,000 jobs were lost—much worse than expected. In the first 10 months of 2008, there have been 1.2 million job losses in the US. That’s not all.

Indeed, economists feel that the US economy, which contracted 0.3 per cent in the third quarter—the biggest decline in seven years— is now headed for a recession. This contraction was driven by a decline of 3.1 per cent in consumer spending—the biggest drop in 28 years. And since consumer spending is the biggest component of the US GDP—accounting for as much as 70 per cent of economic activity—it took its toll on the economy as a whole. The International Monetary Fund, in its latest report, emphasises that the problem is acute. “The US economy will suffer as households respond to depreciating real and financial assets and tightening financial conditions,” it says.

Recessionary conditions are now spreading to other parts of the globe as well. In the UK, for instance, the economy shrank 0.5 per cent in the three months to October, while in Germany, industrial production fell 3.6 per cent in September (the largest monthly decline in 14 years). The IMF now predicts that the world economy will expand just 3 per cent next year, the slowest expansion since 2002. That’s an average, it says, that points to a global recession.

How does this impact India? Clearly, the slowdown in the US and the rest of the world is bad news for India. The US is India’s largest trading partner. Already, exports are showing signs of flagging. In September, export growth plunged sharply to just 10.4 per cent, from an average of over 30 per cent earlier. And exporters say this is largely due to difficult business conditions in the US and Europe. Says G.K. Gupta, President, Federation of Indian Export Organisations (FIEO): “The outlook for exporters has completely changed. It’s a double whammy. One, customers have now started cancelling orders. Then, even payments are not being made on time.”

But it is the global credit squeeze, as a result of the US financial crisis, that will really impact India. This is expected to severely dent capital account inflows into the country and hurt the India growth story. In 2007-08, for instance, the country received almost $108 billion (Rs 540,000 crore) through the capital account (which includes FDI, debt, FII, ECB and NRI flows). This is expected to fall sharply this year; some estimates expect such flows to halve this year. Says Sachchidanand Shukla, Economist, Enam: “Our trade linkage with the US is limited but we are far more linked to financial flows from that country. The global liquidity crunch is more likely to hurt the India growth story.” Prime Minister Manmohan Singh acknowledged this recently when he said: “A crisis of this magnitude is bound to affect our economy and it has. International credit has shrunk, with adverse effects on our companies and banks.”

The IMF now estimates India to grow at just under 8 per cent this year; this is expected to taper off further to 6.3 per cent in 2009. A prolonged recession in the US will take a severe toll on the India growth story. Despite a massive co-ordinated bailout plan by regulators across the world, economists expect the adverse conditions to last for at least another year.

While India’s trade linkage with the US is limited, it is far more linked to financial flows from that country. The global liquidity crunch will hurt the India growth story.