The road ahead

Surviving Recession

The East Asian crisis of the 1990s was traced to the crony capitalism, lax financial regulations, unhindered capital mobility across borders owing to complete capital account convertibility and weak macro financial architecture. That was the beginning of the extant financial crisis. But we never learnt our lesson and when you don’t learn from the history, it does repeat itself as we are witnessing now.

There was a time when the champions of neo-classical liberalism had rejoiced and celebrated the fall of Communism in the late 1980s. It was reflected in the euphoric assertions of many observers and theorists, including the high priest of liberal capitalism, Francis Fukuyama. He observed that history had ended with the fading of the Iron Curtain and with liberal capitalism having won conclusively, also the race between the two ideologies. However, all such assertions have proved to be misplaced with capitalism itself standing discredited in the light of recent developments.

The raging recession in the world economy coming in the wake of the multiple bankruptcies of the industrial and financial majors the world over has proved all claims of capitalist efficiency and transparency false. With hindsight we all know that liberal capitalism as symptomised by the laissez faire economy is definitely not the answer to all the problems afflicting this world.

Had this been the case, we would not be confronting the demonic recession as staring us in the face. Now we know that liberal capitalism is not an unblemished and unalloyed good; that it can not be left completely unregulated and uncontrolled as its votaries have always championed.

We, in India, have been deluding ourselves all these years believing that a larger consumer base and less dependence on external trade shall suitably insulate our domestic economy from the negative impacts of recession or stagflation. However, many of these observers have been proved wrong. This follows reduction in production and consequent slump in available employment opportunities. All this has had a cascading effect on our economy resulting in lower growth rates.

There are many who feel that our savings should now be utilised to spur the domestic economy by increased spending. But before we can do so, the greenbacks already available in the economy seem to be finding very few takers. What is really surprising is the fact that notwithstanding the substantial reduction in the interest rates, the loan off-takes from the various financial/banking institutions have been very less. And this is said to be the trend the world over. In fact, all these institutions have also been very cagey about extending loans.

Cautious approach
We may haul up the behaviour of our orthodox and conservative banking system, but again the same is said to have saved us from the onset of a recessionary deluge unlike the reckless credit extensions experienced in the West, long governed by the Basel banking norms. Also, our cautious approach to full capital account convertibility and opening of our banking and insurance sectors completely to foreign investments are among other various factors which spared us a full-blown recession.

The recent surge of stock markets, moderate increase in demand of consumer goods and real estate and improvement in other financial indicators are positive signs. This follows supportive government policies, liberal financial package, recommendations of the 6th Pay Commission and waiving of farmers’ loans.

However, there is a somewhat quaint observation which says that India’s so-called ‘underground’ or ‘parallel’ economy is also cushioning it from the malignant effects of the present recession. The proponents of this school believe that all this money is keeping the demand afloat, thereby helping in maintenance of a moderate growth rate.

There has been a demand to replace dollar with a new world currency like Special Drawing Rights (SDRs) or some other currency, as also suggested by China. But it is easier said than done. We actually seem to have got stuck in a vicious cycle. A strong dollar, for the moment, is in our own interest. A falling dollar may lead to further decline of the US economy to which many of the satellite or peripheral economies are hitched and may be seriously affected by the same.

The crisis shall only ratchet up if all the creditor countries decide to withdraw their foreign exchange deposits from the US as is being demanded by some. The said withdrawal shall dent and maul the dollar further, thereby hurting everyone. A weakened US economy will become the nemesis for all, thereby nixing any chance of economic revival or, at least, might delay the same for a long time to come.

With the weakening of the so-called Washington Consensus, the world pecking order is already being restructured wherein the US might not be the sole super power. The BRIC powers may come to occupy the centre stage of the world financial system, something that people like Henry Kissinger, Kenichie Ohmae, Kishore Mahbubani, Kenneth Waltz and many others have been predicting for a long time. Meanwhile, we need to tread like a trapeze artiste to maintain a fine balance between the minimalism of liberal capitalism and maximalism of social welfarism.

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