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RBI Governor Raghuram Rajan’s worries about major recessions

Dr. P Pullarao

India can expect un-predictable economic storms:

A few days Dr. Raghuram  Rajan,  Governor of the Reserve Bank of India loudly pondered  that  an economic depression  like that which  was there in the 1920s  might well hit the world.  Rajan’s exact words were :

 

The global economy is slowly slipping into problems reminiscent of the Great Depression of the 1930s, Reserve Bank of India (RBI) governor Raghuram Rajan has  warned, asking central banks from across the world to definethe rules of the game” to find a solution. He based his thinking on the fact that the important economies of the world like Japan and Europe were really in a recession and that they were important economic motors if they did not recover, then a recession might hit the world.

 

Raghuram Rajan might be what they call loose cannon. Or now and then he feels he needs attention and utters some strange improbable but possible predictions. Of course, within a day Governor Raghuram Rajan withdrew his statement and said that he was   misconstrued. But the fact remains that an economist of his standing even thought of it.  The fact that Greece has slid into an economic downward spiral has puzzled economic observers. Greece is a small country of 11 million with 22 million foreign tourists every year. There is no shortage of foreign exchange flowing into Greece. Plus, at least a million Greeks were working in other European countries and sending back money to their dependents.

 

The stubborn economic problems in France, Italy and Spain in Europe is also a worrisome factor. These countries are important economies in their own way   and they seem to have no solutions to get out of their economic recessions.

 

Then we come to China which has slowed down. The usual excuse given for the Chinese slowdown is that they invested too much in their infra-structure and this has led to stagnation and poor use of capital.   But why did China invest so poorly at, if they are so smart  ?

 

The USA is recovering fast. But the oil-producing economies are facing an inevitable slowdown since oil prices have not recovered from their usual highs. India is dependent on China, USA and oil-producing Middle East countries. The fact that USA is recovering is good. But China is our biggest trading partner. The Chinese have huge foreign exchange reserves. But how long can they sustain a presence that all is well? The Chinese also do not have a democratic system and hence do not have not worry about elections. But if their recessionary trend continues, then their Silk Road, their Maritime Silk road and other ambitious projects will be negatively affected.

 

The aggression of the Chinese with their neighbors is inversely related to their economic situation. Perhaps the Chinese aggression with Japan, Korea, Philippines and Vietnam over territorial claims and the un-precedented building of artificial islands   in the sea is an indication that they are involved in distracting their population. The Chinese government is offering a strong dose of nationalism to their people to distract them from poor economic growth.

 

There are 7 million Indians working in the Gulf and the Middle East. If their economies go into a downward spiral, then millions of Indians lose their jobs. it is already happening in a small way. Right now, the Oil producers are using their “Sovereign Wealth Funds’ to maintain their high spending. If they reduce their spending, their domestic populations will get restive and who knows where another “ Arab Spring “ might go ?

 

Governor Raghuram Rajan made his reputation abroad in predicting the 2008 recession.  He has a great record of such predictions. So when he talks about a world-wide recession, everyone worries.

 

India cannot avoid recession if it hits major parts of the world. We are also dependent on earnings from our workers abroad. We are dependent on exports of software and IT sector products. If there is lower demand, then both these crucial sectors will be affected. India can of course make alternate plans to meet such challenges, right now; there is a window of opportunity of low oil prices, which we can use to build critical infra-structure.  But there is also the danger that we might go overboard. There is a wrong thinking in India corridors of power that if we just build roads, ports, airports and bridges, then the economy will automatically take care of itself. The problem arises   if no one uses the ports, roads and other infra-structure after they are built.

 

A wise policy would be to build only what is needed and carefully calibrate needs with possibilities. Any mismatch will create more problems for India than the over-capacities do in China.

 

Coming to RBI Governor Raghuram Rajan’s initial feeling that great recession might very well be on its way, India cannot do much about it. India cannot prevent the recession touching other parts of the world. But India can protect itself from the worst impact of such a potential recession.

 

After the severe world-wide recession of the 1930s, economists have developed skills to ensure that economic cycles do not erupt with precision every few years. Yet, recessions do occur.  India might very well ask Raghuram Rajan whether he has any prescriptions for a potential recession. Better to be prepared for the worst and hope for the best. The best solution is for India to have a prudent budget and ensure that  government money is carefully spent.

Dr P Pulla Rao is a Socio-political and Economic analyst

 

 

 

 

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