It is truly amazing how bravado about the state of the economy of India and the world can rapidly dissipate into a scenario of gloom and doom. Indians who had never cared two hoots about the ancient civilization of Greece – or, for that matter, about European countries like Portugal, Italy, Ireland or Spain – are suddenly all agog about whether the new government in Athens will re-introduce the drachma; thereby becoming the first of the 17 countries out of the 27 that comprise the European Union to break away from the Eurozone. This is hardly surprising.
The impact of the double-dip recession in Europe is being felt across the globe and in India as well. The sovereign-debt crisis in Greece and the other weak economies of the EU has contributed to the sharp and sudden fall in the value of the Indian rupee vis-à-vis the American dollar. On the political front, the weakening of centrist and conservative political parties in Europe finds reflection in India in the diminished power of the second United Progressive Alliance (UPA) coalition government led by the centre-left Congress party after eight years. There has been, in Europe as well as in India, a resurgence of extreme-right and extreme-left political groups.
The sharpening of the political divide has been accompanied by a widening of economic inequality that has resulted in growing social tensions, in India and elsewhere, including in Europe. It is difficult – and unrealistic – to expect the proverbial green shoots of recovery to grow and become luscious branches and foliage in the near future. The crisis in Europe is almost certainly going to continue through calendar 2012 and when improvement comes, it is probably going to be excruciatingly slow.
In Europe, there is considerable popular resentment because of growing unemployment and stagnating or declining earnings. The situation is hardly different in India. In fact, the situation in this country is worse for two reasons. The high levels of food inflation over the last five years have sharply diminished the real incomes of the underprivileged and widened the gap between the rich and the poor. Add to that the brazen acts of corruption by those in positions of power and authority in India that have exacerbated social unrest.
India cannot blame the rest of the world for many of its problems though there is no gainsaying the fact that a hostile and uncertain external environment has compounded the current woes of this country and has spooked foreign institutional investors. India’s trade deficit jumped by a record 56 per cent between 2010-11 and 2011-12 as imports jumped by nearly a third while the rate of growth of exports halved from over 40 per cent between 2009-10 and 2010-11.
Imports are inelastic with crude oil imports accounting for over one-third of India’s total import bill. Add gold to oil and the proportion exceeds half of the country’s total imports. Despite the depreciation in the rupee by over a fifth in a year, India’s exports cannot accelerate beyond a point for two important factors. First, many of the country’s export markets in the West have shrunk or disappeared altogether. Secondly, even as India follows a Look East policy, the economy of its biggest trading partner, China, has also been hit by the Great Recession – for the first time in decades, the Chinese government has reduced its economic growth projection for the current calendar year from 8 per cent to 7.5 per cent.
To return to Europe, the crisis in that part of the world holds crucial lessons for a multi-cultural and highly heterogeneous country like India. For many decades, there was no dearth of people who believed that India could never survive as a united nation-state and that we should become a confederation of countries like Europe. Yet in Europe, attempts to bring about economic unity through a common currency are not working too well, now that the going is rough. We in India are struggling to bring about the most important economic reform measure that would unite our market and in the process, bring about greater transparency and reduce corruption: that is, a common goods and services tax.