Monday, April 20, 2009

How Long Is The Tunnel?

One interesting thing I realize when I speak to anyone in India, the recession has not affected the morale yet. Everyone seems to say, yes, times are bad, but it will be over yet soon. Some even say that the recession will not affect India at all, at least in a major way. They point to the prudence of Indian banks, and are emboldened by Joseph Stiglitz recently saying that the Reserve Bank of India has better judgement than the Federal Reserve. More to the point, many Indian businessmen point to the huge untapped potential of the country and see the recession as a temporary blip, and expect things to return to usual growth soon.

Sometimes, I feel this is a very Indian thing. I spoke to friends in Dubai, who strongly believes that things will be back to normal soon. I also had discussions with Indians in the UK, and when I told them that the house prices are going down, they told me that this can not happen for too long and they would rather go out and try to buy houses now. I have this feeling that Indians are the most bullish nation on earth today. I can see people investing in new businesses in India and also about expanding capacity and hiring people. If this recession is about psychology, I am sure Indians will push through this global pessimism with undying hope and the economy in India will soon turn a corner.

The question is, of course, how real is this optimism. I am aware that Indians lived with a protected economy for many generations, and our ways of looking at the world is yet to change. The Indian middle classes are usually so protected and privileged that they have not seen major disasters first hand, neither a war nor global recession [in fact, nor a major natural disaster, which always have hit the poorer people]. For rest of the world, this recession may be bringing back memories of bad times, but the Indian middle class has no memories. Hence, while the assertions may be true, one does not know how real, and therefore sustainable, is the optimism.

The global economy, however, does seem to be turning a corner. There are some good results on the Wall Street, as my Indian friends point out, and stocks have started moving up the world over. Financial service companies have started afresh - it did not go unnoticed that Goldman Sachs has reported an unexpectedly good result and even said they would return the government money they took earlier. It also hit home that Citi group seems to be out of the woods. It is also apparent that the inventory levels are running low and production will soon start an upward trend. The commodity prices, still low, are showing signs of firming up, and this is good news too. In Britain, Gordon Brown's Housing Package possibly started working and the house prices seem somewhere near the bottom, indicating that this summer may be better than the previous one for homeowners. So, in summary, some of my optimistic friends are indeed right - there are green shoots of life in the horizon.

However, there are enormous global risks we face. The recovery is still fragile, and the risks of country defaults are very much real. The economy is currently on life support and chugging along somewhat stably, but that is far from being out of danger. The big risk, this summer, is of inflation. The major economies of the world have fought the credit contraction by flooding the market with cheap liquidity and by keeping interest rates artificially low. This has been helped by a general slamming of breaks on expenses - both by businesses and consumers - and slowing demand allowed the liquidity to flow in without an sharp upturn of inflation.

The policy makers must be very cautious right now and reign in the liquidity just when another bubble starts forming. This is about reading minds and being ahead in the game in the free market, which, as we have seen, they are not very good at. So, the real risk is that inflation may make a comeback. This will surely spoil the party and force everyone to run for cover.

Coming back to India, it also seems that the economy has got a little bit of extra support from the elections, when the black money flows in to the real economy and an extra investment of about Rs. 200 billion takes place, creating jobs and keeping everyone busy. It will be interesting to watch what happens in the immediate aftermath, especially if the resultant inflation kicks in at the same time.

So, how long is the tunnel? I am no pessimist, but it sure looks longer than end of this year. If I have to take a guess, till the end of 2010 if everything goes right, when growth and jobs will return. And, if things don't go right, obviously this can be much worse. The key problem that we have now is that our wealth is not equitably distributed, and more unequal we become, lesser control we have on this economic flu. The way we have handled the credit crisis so far have only made our societies more unequal, and weakened the longer term economic prospect. I thought this would be an unfinished recession, and so far, it seems it would indeed be. The best thing one should now be is pragmatic and practical, and being optimistic is not the most intelligent response to what seems to be the deepest crisis we have faced in a long long time.


Rakesh Poddar said...

Hi Supriyo,

I am not an economist, but what I understand is that the current recession is a kind of correction of an unduly overheated economy. If that's what it is, then this recession has to be a temporary phenomenon.

Don't you think the pessimism in the West is actually fuelling the recession further? I am not meaning to be critical... just analytical.


Supriyo Chaudhuri said...

Hi Rakesh

Thanks for this comment. Indeed, this recession denotes a correction - the question is how deep this is and what cascading effect the process of correction will have.

This recession is indeed worse than any in living memory, as a number of sectors have turned sour at the same time. The other problem is that the economies are globally integrated more than ever, and hence it has spread fast and wide.

You are also right that the pessimism is the reason, and I had to note the particularly optimistic tone that I hear everywhere in India. This recession, thanks to network TV and internet, is a 24x7 recession and the public psyche is indeed deeply scarred. I know a number of entrepreneurs in the UK who would rather keep their money in the bank till things have become clearer.

The point I am trying to make at the same time is that while that pessimism does not help, and indeed there are positive signs around us today, we are better off to have a realistic perspective of what happened. It seems that this recession will be shallow, but since we shall not address the systemic problems that this recession brought forth, we may face a deeper, bigger catastrophy in the coming years.

Thanks & regards,


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