How India can deal with looming global recession?

The world economy is slowly slipping into a Great Depression of the 1930s like situation, says Reserve Bank of India (RBI) Governor Raghuram Rajan advising the central banks to define “the rules of the game” in the light of the competitive easy money policies being followed by developed and  a few emerging economies. Though, RBI later on tried to downplay the governor's comment, world economic situation barring a few bright spots seems to be really bad. #Recession#

Europe is struggling despite the latest Greek debt deal. China's poor data shows that it will go down on growth path faster than its policy makers would want. Brazil and Russia are expected to post negative GDP numbers. Middle east is still struggling to deal with subdued crude prices. Japan is risking inflation.Things seems to be somewhat better in the US given the good (sales) number posted by the auto sector and comfortable employment data. #China#

Coming to India, with the revision in GDP computation method, things look okay but only on the surface. Reality is quite different. Uncertainties over monsoon remain, corporate investments are not picking up and India's export is hovering around US $ 300 billions over the last three fiscals. Continuing its declining trend over the last 6 months, India's merchandise exports shrank by 20.2% to $22.35 billion in May 2015. 

Given, India's growing dependence (as reflected by high trade/GDP ratio of over 50%), India can't easily escape the implications of an all out global recession that's looming. However, it can take several (mostly internal) measures that will help it to minimize the adverse impact of the global economic downturn. Some of them can be:

• Given the huge infrastructure gap in roads to ports and power supplies, India should/can go for infrastructure investment, given the existence of high multiplier effect, in a big way 
• Another sector that too has strong backward and forward linkage with other sectors is housing. Policy makers should persuade (may be through the use of stick - the immediate introduction of real estate regulator) the builders to cut their margins and reduce apartment prices to make them realistic.
• That they will be forced to do anyways, sooner than they would want to admit given their over-leveraged balance sheets and buyers' preference to rent out rather than outright purchase.
• Price correction to the extent of 25-30% has already happened in many parts of the country starting with NCR/Delhi, and it will soon start in other parts as well. The reason is simple: housing market in India is driven by investors. When low return persists for a long time or prices correct, investors will lose interest as they are there for return.
• Already because of moderating inflation, investment in gold has been on rapid decline. Investment in housing will soon follow, with measures to check use of black money in real estate transaction being introduced and inflation tamed.

Goods & Services Tax (GST)

• Implementation of GST preferably ahead of schedule with no exceptions. That would add 1 to 2 % to India's GDP. India is a big consumer market with over 1.2 billion people and US$ 2 trillion economy that can become really accessible to businesses post the implementation of GST

MSMEs

• Over 45 million Micro, Small and Medium Enterprises (MSMEs) employing over 100 million people - if given right environment and support from institutional credit sources, they can do wonders to India's GDP growth. Mudra bank play an important role in helping MSMEs

 High Multiplier Tourism 

• India has not been able to tap its tourism potential as can be seen from so low foreign tourist arrivals (FTAs). Really treating tourists as guests in true spirit of atithi devo bhava compared to try fleecing them from airport to hotels to shopping centers will help India increase inbound and outbound tourism in a big way. Hotel rates in India are quite high compared to service they deliver. As a result, over 40% of the hotel rooms go unoccupied according to Rooms Tonite. Hotels can reduce their charges and easily attract more guests who will further help sales of transporters, restaurants and gift sellers.
• And for God sake, can we make it safer for women tourists to travel alone wherever they want to go without fearing for their lives?

Trade Policy Measures

• Increased focused/short term incentives to increase exports to the US (which is in better shape) will help employment intensive sectors such as apparel, pharmaceuticals and IT/ITES with high multiplier effects
• Imposing sourcing restrictions on duty free import of apparel items from least developed countries in Asia and Africa will also help many sectors such as textile and related industries 
• Given India's rising trade deficit, it's time to persuade China to give real and improved market access to India's exports of Cotton, Pharmaceuticals and Services by reducing or removing its trade barriers 
• India's trade with SAARC especially that with Pakistan is very low. It's time, India encouraged trading within SAARC. With PM Modi focusing on the neighborhood, things should certainly improve going forwrd.
• India needs to deepen the coverage of goods and services under it's FTAs; expansion of India-Mercosur PTA and implementation of the services part of India-ASEAN trade pact can help India's exports even in the current economic environment

Ease of Doing Business

• Last but not the least, it's time to walk the talk on ease of doing business given the poor ranking of India at 142 to boost up investment especially FDI. It's important to realize that FDI has become an important vehicle for promoting exports in a time dominated by global and regional production networks. When it comes to ease of doing business, it's not only the difficulties in complying with a myriad of India's complex regulations...but the unpredictability of regulatory changes that's the real pain for investors. 
• Are the policy makers listening? 

Photo: actual photo of Juhu Beach, Mumbai  

If you like this post, please click the thumbs up icon above or share it with friends and colleagues. Would love to have your thoughts in the comments section below. Even if you don't agree with me, please feel free to post your criticism. Any other suggestions on how India can deal with global downturn is most welcome.

A modified version of this post has been published by The Hindu Business Line on 15th July 2015 - "Can India duck the global recession?