Thoughts on India and the global economy

by Manshu on January 13, 2012

in Opinion

Kish had suggested this topic in the Suggest a Topic section, and I had it in drafts for a long time because I wasn’t quite sure how to approach this topic, and after a few re-writes I’ve decided to just pen down some thoughts I’ve had in the last few months.

When I think about the global economy – I think mainly of the US, China and Europe and India’s position with respect to these countries. That’s not because Saudi Arabia or UAE is less important but just because there doesn’t seem to be any big changes taking place there right now.

Let’s start with the US – in the last couple of months or so the data coming from the US has been largely positive and that’s different from how things were in the past few years before that. This is great news for the US, and the rest of the world because a lot of countries run trade surpluses with the US and depend on them for their own growth. More and more it looks like Warren Buffett’s prediction of a recession being very, very unlikely will come true. That is a positive for everyone.

Moving on to China – I think the question in the last few months has largely been how well China can manage it’s slowdown. No one seems to believe that property prices will start rising steadily again, or that major infrastructure spending will continue, but the main concern has been whether the Chinese financial system be able to withstand the slowdown and real estate losses and whether the authorities will be able to manage it such that there is no chaos.

I think their massive reserves will help them manage the losses and not let that spill over to the real economy too much. China is India’s third largest export market, and the largest import partner so any troubles in that country will be felt in India too but somehow from an Indian perspective – China doesn’t seem to be on the radar of many people. I don’t know why that is.

While Europe has not been getting as much coverage as it was in November or even December, none of the things there have fundamentally changed. The issue has been pushed down to deal with later, and that later usually arrives sooner than most people expect.

As far as Greece in particular is concerned – it is a very small export market for India and has shrunk by about 40% in the last year without anyone noticing it. The problem however is that the issues with Greece could spill over to the bigger economies and drag the whole of Europe with them. That has already happened, and it looks like it will continue to happen, and be a drag on global growth. The sooner the issue gets resolved – the better it is – but based on what has happened – I think this will continue to drag on for some more time.

While these issues have lingered for some time – I think the domestic problems in India are far bigger than the global headwinds of the last year, and that to my mind is a much much bigger threat to India’s growth than anything going on in the global economy. For a long time, we’ve just assumed that the economy will continue to grow at 8 or 9% but we’re finding out that it’s not the case. You can’t take this growth for granted and expect it without having sound policies and infrastructure in place.

Those steps have to be taken for India’s steady growth and at least the silver lining there is that those are within India’s control and the first wave of liberalization has shown that they yield positive results when taken and that should be the focus for everyone going forward as well.

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