The new normal PDF Print E-mail
Monday, 08 August 2011 00:00
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Given their large accumulation of debt and faltering growth, it was always obvious that recovery in the US and Europe would be patchy, but just how bad was brought home forcefully in the last week to ten days. As a result, we’re now dealing with several ‘firsts’. India-style data glitches and revisions now tell us that US growth in Q4 2008, the peak of the recession, wasn’t -6.8% but was -8.9%, the worst fall since 1958—given the anaemic growth since, this means US output today is still below that in 2007. After the market crash on Thursday to levels not seen since fall 2008 in the US, S&P lowered the US’s AAA rating to AA+, a first after 1941—this means a hike in borrowing costs all around, approximately $100 billion a year for the US government over the current $414 billion. As the rating has a negative outlook attached to it, this means there’s a possibility of another downgrade in another 12-18 months if there’s no substantial progress—that S&P should downgrade the US even after it found it had over-projected government debt in 2021 by 10%, or $2 trillion, is indicative of just how deep-seated the crisis is. US markets stabilised on Friday and may look up because US corporate earnings are good (FT’s Lex points out that, at 8.8%, the earnings are four times those on US Treasuries). But these can’t look up for long if US growth is anaemic—US private consumption growth is down to an 8-quarter low. Lower commodity prices could help, but these are more driven by emerging economies’ demand (The Economist’s index puts them at double December 2008 levels). So even if the ‘stall-speed’ growth we’re currently seeing doesn’t convert to double-dip, the considerable deleveraging the US and Europe have to do to get debt levels back to normal means there will be several bouts of crises in future.


For Indian politicians, this means there’s no more time for policy paralysis and the government just has to get a move on. A 7% growth period offers India the time to fix things and that’s what politicians need to concentrate on. This means passing important legislations (GST and insurance come to mind immediately), taking hard decisions instead of frittering funds (think of the colossal R42,000 crore Air India needs over the decade and the R1,15,000 crore oil subsidy this year), allowing non-PSUs to function (think of the finance ministry’s attempt to foist a chief at UTI AMC and the arm-twisting of Cairn-Vedanta), filling up PSU posts (ONGC has been headless for 6 months already), giving clearances to investments (Posco, Vedanta …), taking action in corruption cases (the judgment on cancelling Raja’s licences is pending in the Supreme Court) … These decisions, and more, were always important. The US crisis has also made them urgent.


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