The global economic crisis

Jayshree Sengupta

SINCE the liberalisation of the economy in 1991, India is inexorably linked with the world economy. The bad news on our export front is also mainly due to the global slowdown and slack demand in developed countries’ markets. This year in the World Economic Forum’s meeting at Davos, the global economic scene was seen by many as ‘hanging in the balance’. There is no doubt that there is trouble ahead for the global economy and the IMF chief Christine Lagarde has lowered the forecast for the world economy’s growth at 3.1 per cent.

Though there has been economic recovery in the US, there are still remnants of the 2008 financial crisis in the global economy with recession threatening some of the big emerging market economies (EMs). China’s economic slowdown has also been bad for the global economy. 

Apart from China, the recent US economic recovery and the US Federal Reserve’s interest rate hike in December 2015 can be seen as the reason behind the recent stock market turmoil in many countries, including India. The exodus of FIIs from the emerging markets was due to the raising of US interest rates from zero to 0.25 per cent. Emerging markets, specially the BRICS countries, once the favourite of FIIs, are not so today. Brazil is already in recession because of falling commodity prices, corruption and escalating public debt, Russia and South Africa are also on the brink of a recession because of falling oil and commodity prices. China’s GDP though slowing down is still at 6.9 per cent.

As RBI chief Raghuram Rajan said recently there has been too much pumping of liquidity in the world economy by the US, EU and Japan through quantitative easing (QE) in the past and FIIs went to emerging markets in search of the highest returns. Now that they have gone because EMs are seeing bad times, the much-needed correction is taking place. As Nobel laureate Joseph Stiglitz said in Davos: “There was a kind of excessive euphoria, undoubtedly the QE monetary policy pumped up asset prices but didn’t do much for pumping up the real economy. Where was all the liquidity going? Some of it went just into the balance sheets and wasn’t lent out but some of it went to increasing asset prices.” As the chief economist of the IMF said at Davos: “There is a difficult adjustment ahead in emerging markets.”

The US dollar has become stronger as FIIs returned with their dollars. All currencies, including the rupee, have depreciated against the dollar. Fortunately the US Federal Reserve has not raised interest rates further in the recent review on January 27, 2016, otherwise there would have been another stock market upheaval.

On the whole, the crisis that the world is facing may not be as severe as the economic crisis of 2008 because there has not been too much leveraging by banks and a huge amount of derivative trading has not taken place. But this time, protectionism and trade wars are on like in the 1930s. For example, after the devaluation of the yuan, the US hiked tariffs on Chinese steel imports by 256 per cent. India too is raising tariff rates on steel imports.

Another crisis which is waiting to happen is the digitisation revolution which will wipe out jobs, not only in rich countries, but also in China and India. Low-skilled labour is very easily replicated by robots and hence jobs will be affected in developing countries. This will impact job growth in India also. Already big industries have gone for automation and India’s high growth has been capital intensive in nature in the past.

The global crisis has been exacerbated by rising inequality. According to the latest Oxfam report, there is a global crisis ahead due to the rising inequality of income. According to the report, 62 persons own as much as 3.5 billion poorest people — half of humanity. And this inequality has been increasing rapidly, because in 2010, this number was 288; last year it was 80 and in a few years it could be just 10! This is a dangerous trend because it slows down economic growth and sparks social unrest.

If the people in the troubled areas of the world had higher incomes and jobs, peace would have ruled in those regions. Thus governments and business leaders should do something to tackle rising inequality. According to Oxfam chief Winnie Byanyima, the concentration of wealth in fewer hands is the result of 30 years of deregulation, privatisation, financial secrecy and globalisation.

The refugee crisis faced by the western countries, particularly Europe, is partly also the result of such inequalities of income, and now the EU has no option but to accept them and offer them asylum. If neighbouring countries have big differences in income, it will inevitably lead to migration and problems of managing displaced people in the host country. Even before the current refugee crisis, there was a regular inflow of people from poorer neighbouring countries of the EU which remained a fortress for a long time. Scores of people died every year trying to cross the Mediterranean from North Africa. India has absorbed millions of economic refugees in the past.

There was much optimism in Davos about India which was showcased as a rising star. With its 7.4 per cent rate of growth, India seems to be doing better than most but the fact remains that India is facing many problems.  There is a crisis in agriculture, especially in drought-stricken areas and crop damage due to untimely rains, rising inequality, a banking crisis as well as inadequate infrastructure. When billionaires owe Indian banks huge sums of money and go scot free, and yet indulge in spectacular and vulgar displays of wealth, naturally, it will create widespread animosity and resentment. India, like China, has a big problem of rising inequality and the government must take action and recover money from debt defaulters rather than write off their debt. India has to take heed that global economic situation is gloomy and to have a healthy banking system that encourages savings, and not spending sprees, is vital for sustained economic growth.