The common excuse of politicians for the current economic crisis is, due to well-planned regulations, Indian economy is least suffering and has maintained a good GDP growth rate of 5.3%, while most of the other nations are suffering deep negative growth. By such bombastic claims of growth because of the government regulations, Indian government not only eludes the common man, but the current government also makes a political strongpoint for the upcoming general election.
Yet recently, one of the most prominent economists of India Mr. Surjit Bhalla has claimed that this is false comfort based on incorrect calculations. Citing OECD data, he says India actually had negative growth (-11.8%) in Q4 of 2008, not the 5.3% claimed by the government.1
In addition, OECD based report says that in comparison, Indian economy fall with negative growth of 11.8% if we compare the GDP of 2007 for the fourth quarter with the fourth quarter of 2008.
Indian growth is far worse than in the US (-6.2%), UK (-8.4%) or European Union (-8.2%), though better than in Japan (-17.8%) or Korea (-28.8%).
Indian central statistical organization (CSO) calculates the growth rate by comparing the GDP in fourth quarter of previous fiscal year (2007) with the GDP of fourth Quarter in current fiscal year (2008). On the other hand, most of the other countries calculate their GDP growth rate by comparing the previous Quarter (Q3) of the same fiscal year with the current Quarter (Q4), adjusting the calculations and annualizing the GDP growth by multiplying it with four.
Indian government denies this standard procedure of calculation because of the agricultural dependence of Indian economy, arguing that agricultural data are too much volatile and season dependent
Indian economist Swami Nathan Ayer provided a better option of calculations. He simply calculated the change and comparison of non-agricultural growth and agricultural growth separately, and his figure suggested that the non-agricultural growth in Fourth quarter of fiscal year is 3.5% that is much less than what government has announced, also, the collective agricultural and non-agricultural growth of India for the fourth quarter of 2008 is Negative 1.6%.2
Obviously, it is clear that the government figures for GDP are nothing but sort of eluding concept to swing favours of electorate, claiming the government’s ability to tackle the tricky situation of meltdown.
Similarly, China also has registered a growth rate of 6%-7% in the recent quarter and obviously the western governments blames both India and China of manipulating their GDP rates falsely.
Yet the question is does the GDP growth rate matters?
As a matter of fact, GDP growth rate does not signify the potential of India or China to counter the global recession.
Even if we consider that the GDP of both India and China is absolute zero or may be negative, the potential China and India have to come over the current recession period is much more than USA in comparison, and till now, India and China have adopted much better policies than USA.
The main problem with emphasizing GDP is that it only measures aggregate movements of money and cannot measure whether the consumption is efficient or productive. Hence, one of the problems with any stimulus plan is that many policy makers simply look at steps to increase GDP in the short run and ignore the long-run implications — the unseen consequences of policies. For example, building pyramids could indeed boost GDP; however, there is very little economic utility gained from building pyramids and hence in longer turn, such expenses turn out to be burdensome and bad non-productive-assets, causing a new cycle of recession.
The US Keynesian economists often suggest that Americans were funded in part by Asian countries, which, having experienced a calamitous financial crisis in 1997–98, sought to park their savings in safe havens (e.g., US Treasury bonds). As a result, this immense savings distorted the marketplace and caused the ensuing bubble.
In other words, the Asian people saved too much money, lent the United States and other Western governments money at cheap rates, and therefore created an asset bubble. So according to the Western economists, the habit of Asians to save money is the basic reason behind the economic meltdown, and they say that American fell prey to this because of their habits of spending more than what they can earn.
The Keynesians on the other hand, also claims that Asian economies, specially China and India are about to roll down as the production houses and factories of China are closing down because of decreasing exports, outsourcing services are also suffering a lot, and the commercial-construction bubble has also popped up. The stock indices of both China and India have lost all heights people have lost jobs.
The Keynesians obviously claim that in order to survive the downturn, Asian economies should start spending and distributing money to encourage the Asian consumers to spend more and more. Governments should implement a universal car-ownership scheme, build hundreds of aircraft carriers, make new houses, distribute them, and reduce interest rates to zero across the board.
The first thing to be observed is, USA is suffering meltdown because of the extreme habit of spending more and saving nothing or very little. Second thing is, Americans are habitual for taking debts and loans, which often prove out to be the bad assets for the lending banks.
Asians and in particular Indians do not believe in taking loans and often try to avoid increasing any toxic asset, Indian banks also maintain proper check up for their ability to repulse the bas loans, they require 20–30% down payments on houses, and two-thirds of all loans are funded by deposits. As a result, despite huge fiscal deficits of Indian government (which are nothing huge in comparison with deficits of US government) Indian citizens are not suffering too much national debts, also most of them saves at least 50% of their earnings which proves out to be good resource for investment later on and avoid the chances of bad assets and non-payable loans.
Indian situation is way better than American in following ways—
1) Unlike Americans, Indians acknowledge that a venture can fail, and it is responsibility of the entrepreneur if they fail.
U.S government believes that if some entrepreneur fails, whole economy will go down, and hence, entrepreneurs have no right to fail, government bails them out.
On the other hand, although Indian government also seek a way to provide sympathy and to an extent a sort of protection also for the entrepreneurs and businessmen, yet Indian government have avoided providing any direct bailout package for any of the suffering enterprises. The Kingfishers and Jet Airlines did not get any economic stimulus from the government nor the government tried to sacrifice Indian tax-payers money to secure Satyam co. after the fiasco. Government have provided help in both cases indirectly to some extent, yet in comparison, Indian situation is more capitalistic and liberalized than US bailout philosophy.
2) While US have opted to turn its path from privatization to nationalization, India and China have paced up their privatization programs. The IPO of China railways are under consideration of privatization and Indian railway ministry also have plans to partly privatize railways. Obviously, both China and India are going more and more liberalized and capitalist, reducing the control of government on production units systematically.
3) Indian and Chinese GDP are not dependent on loans and household debts, in case of USA, the unpaid loans and debt is the major reason for the bad assets.
4) Although neither India nor China recognizes property rights in proper manner and are at early stages of capitalism, yet the land reforms by China and India have better the situation. This includes granting land-use rights to peasants, empowering them to lease or transfer land to others, that is, proper property rights for the farmers. Gradually, this phenomenon will establish the importance and inalienability of property rights in legal system.
5) Asian economies are opening capital markets, lowering real-estate taxes and abolishing others like the stamp tax on home purchases. Thus, providing more freedom and reducing government interventionism in the market and exchanges.3
6) India has privatized all of the big national banks and insurance agencies including LIC India co. China is obviously one step further to India, China government privatized the Agricultural bank of China recently.
7) The major point of difference is, in place of prompting up the housing bubble, both Indian and Chinese governments have restricted themselves only to reducing taxes and repo rates, as a matter of fact, this is capitalist step. On the other hand, the Fed and US government are trying their best to prevent price deflation by burdening the American tax-payers with huge fiscal deficits of hundreds of billions in form of mortgage backed securities.
8) Both India and China have suffered job losses. In 2008, at least 67,000 factories across China have closed down and hundreds of thousands of migrant workers have moved back to family farms. Obviously, the process is painful, yet Chinese government is not bailing out any of the factories, rather the failed companies and factories are encouraged to opt for bankruptcy to cut off the non-productive-units.
That is the proper capitalistic way. USA on the other hand have opted to cover the failed institutes, companies and factories by providing them bail out and hence adopted the socialistic frame.
9) Despite all warnings about deflation of currency, Indian and Chinese governments so-far have avoided any plan to induce currency in form of mortgage backed securities, or foreign debts and loans, not the governments have induced any sort of increased taxes on citizens. As a matter of fact, the Indian government is actually enjoying the downturn of inflation rates as fall of prices is obviously in favor of the citizens; furthermore, it increases the spending and consumption too.4
As the prices are falling, the huge number of people who lost their jobs and hence their purchasing power, are able to maintain their consumptions to a healthy limit, on the other hand, those who have not been affected by the downturn have got opportunities on behalf of fall of prices. Obviously, this will boost up the economic front of India. In addition, such increased spending will not affect the basic importance of the habit of savings by Asians because these spending will be natural and not enforced by government interventions.
Overall, it can be said that in present context, economies like India and China are more capitalistic and openly favoring free market than the Western economies.
Recently, India and China jointly appealed USA to maintain the standards of free market5 , obviously, in these changed premises, it is the east and not the best that may provide a new wave of liberalization, justice to the individual and hope for freedom.
Let us hope the changed situation bring out the betterment.
- The Negative GDP growth rate of India, Times of India [↩]
- The Negative GDP growth rate of India, Times of India [↩]
- Economic Crisis and stimulus by Government, Reason for Liberty [↩]
- Falling prices is the cure of Deflation, Reason for Liberty [↩]
- China, India and call for Free Market, Reason for Liberty [↩]