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  Why We Should Worry   

Omkar Goswami


“Scaredey cat! Scaredey cat! Can’t catch a rat!” When we were kids in junior school, that’s what was chanted with healthy spite and fervent maliciousness if you backed off from anything or were proven with feet of clay. My confession in matters economic is that I have become a ‘scaredey cat’.

I don’t know how many people realise it, but India is in a very difficult place. Its deterioration from global envy to pathos and titter is huge. And the overhang will continue even after we recover, if we at all do under the present political dispensation.

A good place to begin is the rest of the world, whose ebbs and flows determine how global capital expands or retreats with clicks of the mouse. Let us start with the world’s worst performing allegedly advanced nation: Greece. Its real GDP is expected to shrink by 7.1 per cent in calendar year 2012 compared to 2011. Its current account deficit now runs at almost 7 per cent of GDP, making India’s at 4.5 per cent look positively brilliant. Guess where its interest rate on 10-year government bonds are? It is above 26 per cent — well over the usurious daily rates that moneylenders charge to fish, vegetable and fruit sellers at the bazaars of Mumbai and Delhi.

Unemployment is running at almost 22 per cent. With more than one out of five adults in Greece without jobs, one wonders how long the new political dispensation can last before the people start burning cars and pelting cops at Syntagma Square.

But Greece is only 2.5 per cent of the Euro Zone’s GDP, you might say. So, let us move on to Spain and Italy — two of the big four, along with France and Germany. Spain’s GDP is expected to contract by 1.6 per cent in 2012. Its unemployment is close to 25 per cent, which is the highest in the Euro Zone. Its budget deficit is 6.5 per cent with Prime Minister Rajoy having little or no ability to cut back. Spanish t-bills are being hocked at almost 6.3 per cent; and it has provincial banks have almost 70 per cent exposure to real estate loans, whose bad debts are many times higher than what they recognise.

Italy is also in deep trouble: forecasted GDP for 2012 is expected to shrink by 2 per cent; t-bill rate on 10-year government debt is running at 5.8 per cent; and unemployment is at over 10 per cent.

Then there is Angela Merkel, a chancellor whose parsimony a Konrad Adenauer or Ludwig Erhard would have been proud of. Merkel steadfastly believes that no profligate Euro Zone members — coincidentally, all in southern and Mediterranean Europe — should get any more bailout at the expense of hard working German taxpayers unless they wear sack-cloth and ashes and flagellate themselves, eat unleavened bread with ash, drink stale water and say “Hail Mary” from here to kingdom come. This is silly economics at its most medieval, worthy of Gothic caricature in Asterix comic books.

Now the US and election year. Notwithstanding President Obama’s Supreme Court victory on health insurance, it is true that between now and January 2013 there will be no reforms worth the name. Though rhe US is doing better than the Euro Zone, the economy remains in doldrums. The best case estimate for 2011 GDP growth is 2.3 per cent. Unemployment in election year is ruling at 8.2 per cent — lower than double-digits but bad enough to bedevil Obama; and the budget deficit is at 7.6 per cent of GDP, which can only be brought to balance by 2020 through huge increases in tax or cut in government expenditure.

What about China? GDP growth is expected at 8.2 per cent for 2012, But don’t be surprised if it posts 7.8 per cent — its lowest in many, many years. Despite over $3.5 trillion of foreign currency reserves, China is deeply concerned about how it can re-calibrate the economy towards less excess investment, lower export growth and greater domestic consumption without opening the floodgates of disaffection. This is China’s most fundamental political-economy experiment. Knowing China, it may well be executed; but it won’t be easy.

On to India, where we have done everything possible to shoot ourselves in foot, not once but time and time and time again. We have had to suffer from zero economic and political governance; excess fiscal deficits, whose combined might now runs at over 9 per cent of GDP; a current account deficit that is well over 4 per cent of GDP — more like 4.5 per cent, but whose counting; and leaders who are at best disconnected, and at worst look like gophers at headlights, not knowing where to go.

No wonder I’m a ‘scaredey cat’. So should you be. Pray. But remain scared.

Published: Business World, July 2012


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