Recession 2011: 2011 could be worse for india as us recessio

https://economictimes.indiatimes.com/news/economy/indicators/recession-2011-2011-could-be-worse-for-india-as-us-recession-looms-large/articleshow/9522482.cms

NEW DELHI: India weathered the 2008 crisis well, but there are fears that this time round the country is not even ready for a crisis of much lesser magnitude, let alone a full-blown debt default in Europe or a possible US recession.

Weak finances, persistently high inflation and policy inertia have considerably weakened the government's position today.

"This time our basics are weak. A domestic meltdown is expected and our resilience won't be as much as last time," said Nisha Taneja, professor of economics at ICRIER. Growth estimates are down to 7.2% in the current year, not far from 6.8% the country managed in crisis-ridden 2008-09, and every other indicator is pointing downwards.


Contrast that with 9.3% growth on the eve of the crisis when India could do no wrong. "This time we may be on weaker foundations," chief economic advisor Kaushik Basu told Washington Post last week. Just before the crisis in 2008, the repo rate, the key rate in the economy, was 9%, which was cut quickly to stimulate demand and investments. This time round the best the Reserve Bank can do is to halt the rate increases because despite high borrowing costs consumption demand remains strong and any policy reversal risks inflation going out of hand.

For the same reason, the government is in no position to risk a fiscal stimulus as it will stoke demand and raise inflation. The year 2007-08 began with a fiscal deficit of less than 3% of GDP. This strong fiscal position had allowed the government to announce a Rs 75,000-crore farm debt waiver and meet the generous Sixth Pay Commission award. Both of these, together with rapidly scaling up rural jobs scheme, held up demand when the financial crisis unraveled.


Subsequently, the government was also able to cut taxes and announce other measures to stimulate demand. Although, in the current year, the fiscal deficit is budgeted at 4.7% of GDP, most experts expect the government to breach it by a good margin, with some estimates going as high as 5.5%. In such a situation, a fiscal stimulus is almost ruled out.

"The ability to respond (globally) is very limited this time around," said Samiran Chakraborty, chief economist, Standard Chartered. "The fiscal space in India is also comparatively more constrained." Although the foreign exchange reserves are in excess of $300 billion, the balance of payments situation is weaker and the country could find it difficult to weather an export slump similar to the one in 2008, when growth turned negative for 13 straight months.

The current account deficit is likely at over 2.7% of GDP, much higher than 1.3% in 2007-08, and foreign direct investments are not as forthcoming. The C Rangarajan-headed Prime Minister's Economic Advisory Council expects only $14 billion in inflows in the current year. Even without the crisis, things were not looking good for Indian economy. It has got much worse, though difficult to say how much. "The overall impact of the global uncertainty is difficult to predict as of now," said Pronab Sen, principal advisor to the Planning Commission.