Tougher choice


Obama’s win must shift the focus back to global economy
Article Date: 
Nov 07 2012, 2211

With Obama back for a second term, it’s time for the US to bury the recent excitement and assumptions around the presidential polls and focus once more on the real economic agenda that has a bearing on the global economy. By virtue of being the world’s largest economy, whatever happens in Obama country has direct and indirect implications for economic growth rates across the world. Despite two large quantitative easing packages, it has not been possible to revive the US economy to the extent assumed. Correcting real estate sentiments is crucial to the economic rehabilitation of the US. Now that a third quantitative easing package is already in place and will be released by year-end, liquidity will get a further boost, though there are serious questions on whether this will lift the economy from its present morass. While Wall Street might cheer the easy money policy that will help keep the indices afloat, the real economy remains down in the dumps. Recovery in the job market has been extremely volatile. While cash reserves with American companies may have increased, their topline growth has remained muted, indicating that their coffers are filling up on account of severe cost cuts rather than expansion. In short, in this period of high liquidity, the fiscal situation in the US has come to a stage where it has begun to seriously threaten the global economy. It has been over a year since voices were first raised on how the economy was staring at a fiscal cliff, but the impending elections diverted the nation’s mindspace. It is now time for all to sit up and take note. While President Obama pushes his policy consolidation agenda further, the Fed too has committed itself to an easy money policy till 2014. Beyond that, however, it might be tough for the administration to keep printing the greenback at the same rapid pace as now. A section of the Federal Reserve has already started raising concerns and questioning money policy as a tool to revive the economy. Any policy shift on the fiscal front should impact the Indian economy hard. So, it may be worthwhile for our policy mandarins to start considering the implications of a possible belt tightening by the US, while drawing up revival plans for the Indian economy. It is crucial for policy makers to avoid past mistakes as with underestimating the adverse impact of the European crisis, especially on the export sector. The biggest risk from recessionary trends in Washington is a severe constriction of foreign inflows into India, which would, in any case, hit the global economy very hard. Given that unlike in 2009, when China and Europe were able to somewhat cushion global economic growth, this time around, the three major economies are under severe pressure that global markets can hardly ignore. For Indian policy makers, it is time to burn the midnight oil and ensure that we are able to attract as much long-term flows as possible till the time easy global liquidity prevails. This is one reason why the Indian equity and debt markets have been able to attract decent inflows in the past three years, despite no big economic story emerging out of the country. Should global liquidity begin to tighten, India would be unable to attract fresh capital, straining the domestic growth story even more. We must immediately push our legislators to further liberalise laws and add incentives for foreign corporations setting up manufacturing units in the country. The government’s divestment programme too must be speeded up to get the best out of present conditions.

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