Economy Watch India offers great opportunity
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Economy Watch India offers great opportunity

Archive Manager by WEB DESK
Jan 18, 2009, 12:00 am IST
in General
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The present global crisis can be looked at in two ways. The mainstream approach is that this is a truly ?global? crisis and all countries will sink or sail together through it. This writer'sview, on the other hand, is that we will be affected less than others and in the end this will see us emerge as winners. This is so because our economy is less integrated with the world, thanks to opposition to blind globalisation by Swadeshi Jagaran Manch and others. We are largely self-dependent for both generation of income and meeting our needs of clothes, housing and food. This relative self-sufficiency will insulate us from the ill effects of global crisis and enable us to stand firm while others sink.

The immediate impact of the global crisis on our share markets will certainly be negative as seen in the crash of Sensex. The global inflow of capital which had raised the Sensex to 21k has reversed and so also fortunes of our share markets. The question to consider is whether this negative impact will be of short?or long duration? This writer reckons this will be short-term impact. Only so much capital can go back which has come in earlier. This outflow cannot be unlimited or unending. FIIs have already started coming back. There has been a net inflow of FII funds in December 2008. his is seen in the Sensex rising from 8K to around 10k presently.

This inflow may soon turn big. The outflow in the last quarter was due to panic among western banks. They wanted to bring back their capital to safety of their own economies. This panic has eased now. The global investor is once again start looking for investment opportunity. The dollar is likely to decline in the coming times because the US economy has lost its basic competitive edge. The decline of dollar will encourage American banks to look for a safe haven outside their borders. India can provide precisely such an opportunity. Our growth rate at about 7 per cent is still reasonably good. Inflation has come down to single digits. This strength of ours is likely to persist because we have less connection with the global economy in comparison to other major economies of the world, including China. The relative stability of the Indian economy will soon become visible and global investors may turn in this direction.

There is another reason for us not being hit by outflow of capital. The Global Development Finance report of the World Bank tells us that developing countries as a group have become net exporters of capital in the last five years or so. They have sent huge amounts of capital to the developed countries for building forex reserves. India has sent about $200 billion in the last five years. We have got only about one-half this amount as foreign investment. This one-half amount will be reduced to, say, one-fourth. But, simultaneously, we will not be sending huge amounts for building our forex reserves which have declined from $300 to $250 billion presently. Previously we were sending large amount of our wealth to the western countries and getting a part of the same back in the form of foreign investment. Presently, we are bringing back a part of this our wealth which we had sent abroad and we are loosing a larger part of the foreign investment. The immediate loss to us from repatriation of foreign investment is more than the gain from bringing back our forex reserves hence the rupee is declining. But this will reverse soon. Repatriation of foreign capital will soon turn into an inflow. We also need no longer accumulate large forex reserves since the ?hot money? danger is less. The rupee, therefore, is likely to rise again. It has already gained about Rs 3 since the low of Rs 50 to a dollar.

The second channel through which global meltdown transmits to India is that of trade. We export Basmati rice, garments and software largely to the developed countries. These exports will falter as a result of their economies coming under stress and our exports will be hit. This loss is undisputed. However, we do not only export goods to these countries, we also import goods from them. According to World Bank data we exported goods worth 21 per cent of our GDP in 2005 while we imported goods worth 24 per cent. The decline in prices will affect our exports and imports equally. Thus, we stand to gain more from cheaper imports. For example, the loss to our farmers from lower price of Basmati rice will be more than made up by lower price of phosphate fertilizers. The problem is that loss from imports is immediately visible and hyped up while the gain from imports is kept under the wraps. It is like the salaried employee griping about increase in price of pulses while forgetting that his dearness allowance has increased much more in the same period. Thus the global meltdown will not be a loss proposition for our whole economy even though the export sector will be hit.

I am optimist about the overall impact of the global meltdown on the Indian economy. Creation of a global market means that the price of goods will be same across the world. This applies to wages as well. Globalisation now involves greater global equalisation of wage rates. The reduction in freight rates due to improvement in transport technologies has reduced the wage differential between countries. The existing wage rate for unskilled worker in the United States is about $100 or Rs 5,000 per day. It is Rs 200 per day in India. The two are moving towards one common level. This means the wages in the US will decline while those in India will increase. The decline in US wages will be steep while the increase in Indian wages will be relatively small due to our large population. In the result, business activities will move towards India. Basically we will gain while the developed countries will come under stress. This underlying tendency was covered up in the last few decades by continuous development of new pioneering technologies like jet airplanes and internet which made it possible for the developed countries to charge high prices for their new products. Lately the development of such technologies appears to have reached a plateau and consequently wages in the developed countries are moving south. The only problem is that we are dependent upon America for both capital and exports hence American troubles are affecting us for the present?till the world economy settles in the new paradigm.

(The writer can be contacted at [email protected])

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