JOIN USReserve Bank of India Governor Raghuram Rajan has repeatedly stressed down the past few weeks the need for more global cooperation in unwinding of unconventional monetary policy.
And more recently, Mario Draghi, President of the European Central Bank, recognised the need for such global cooperation, but advised emerging markets to undertake much needed structural reforms and budget consolidation.
The need for global cooperation in a fast integrating world is not new. In 1967, Sir John Hicks had already observed about the limitations of a national central bank in the face of world financial markets. Ben Bernanke’s, famous ‘savings glut’ hypothesis in 2005 also underlined the interconnection of financial markets and global integration. The impact of such integration on developing countries was perhaps best articulated in August 1999 by Bimal Jalan, who had successfully guided the Indian economy through the Asian crisis of 1997, and stressed that the new financial architecture is “too heavily weighted in favour of industrial countries”.
Thus far, the India’s plea for a coordinated unwinding of unconventional monetary policy has been successfully rebuffed by the US. That probably has to do with the size of the economy and lack of mutual interest in each other’s economy. India accounts for less than 3 per cent of global GDP compared to the nearly 20 per cent of the US, and the policy makers have to meet the demands of their local resident population. Illustratively, China with foreign exchange reserves of $3 trillion, reportedly mostly in US treasury, is never complaining about US monetary policy.
Policy makers in the US are also worried that despite a series of stimulus packages, the biggest in US history, since the onset of the crisis in 2008 the US economy continues to limp with latest data for the first quarter of 2014 recording shrinkage of 2.9 per cent in GDP. The objective of economic stimulus to raise demand and employment in the domestic market never materialised. To raise demand, it became necessary to increase government expenditure. In a globally well integrated market, the demand generated by the economic stimulus of the US through the porous borders was probably sustaining employment in countries from where the US was importing goods and services. Empirical evidence on effectiveness of UMP in meeting its objectives is also mixed. And, the period for which the policy is being run is also being questioned by policy makers across the pond dividing America from Europe.
Low growth conundrum
In this difficult growth situation, the US is not alone. India with its aspiring millions is frustratingly suffering from low growth. And, with growth stagnating in India there is scope for close cooperation between the two countries which can cement relations.India suffers from acute shortage of nearly 20 million houses. It does not have existing capacity, including energy and cement, to meet such heavy demand.
Moreover, the country does not have technology to quickly produce low-cost housing for its teeming millions and build buildings with thousands of apartments, all centrally air-conditioned. But, then, India and Indians have the purchasing power. The US can tap this opportunity in India and export virtual homes and material to India, utilising idle capacity in the shipping industry. Second, to address the issue of fragility of recovery in the US, probably, the housing sector with linkages to more than 250 other industries could have been kickstarted by thinking out of the box. The existing population of the US is about 315 million people and by some estimates, the stock of unsold houses in the US was about 2.28 million units in May 2014. In many studies, it emerges that a construction of one million homes leads to employment generation for two million people in the US.
The US can consider allowing, under an incentivised scheme spread over for five years, sale of two million houses to well-educated non-US citizens, including from India, who can afford to purchase a house in the US for say a minimum of half-a-million dollars. This would bring in a minimum of a trillion dollars dedicated to the US housing market. To incentivise the scheme, and ensure that the amount continues to be invested in US housing, the US can add a sweetener clause that after ten years, citizenship to a family of maximum five people per house purchased would be offered. The impact of such immigration on the US demography would be minimal, while the economic wheels would start grinding and relations with India would improve.
(The author is RBI Chair for Economics at the Indian Institute of Management, Bangalore)