India must be cautious

It is a big economic exercise. People know of the World Economic Forum (WEF) meet at Davos in Switzerland. What they don’t know is the quantitative easing (QE) of Bank of England, European Union and rate cut of People’s Bank of China (PBC) that has happened in matter of days. Even Japan is considering one.

One common thread in these exercises is the realisation that the world economy may be in peril without increasing jobs. It cites the QE by the US, which has stimulated job growth to around 3.5 lakh. In short, it means the central bank buys bonds from investors such as banks or pension funds using money it has printed or created electronically. This increases money supply.

Growth in the Eurozone - the 19 Euro using countries – has slowed down in recent months. Some of these are in recession. Europe is also facing the spectre of deflation, when prices fall. Its inflation fell below zero in December. The World Bank (WB) says it might cause severe contraction of the economy as people would stay away from the market expecting further price fall.

The WB has been advocating QE as they had done for the US two years back. The Bank of England had taken to it. The EU has done it. It means European Central bank would buy Euro 50 billion bonds a month till 2016.

It is a clever World Bank ploy to maintain corporate cash books happy by putting pressure on the governments, who finance the supposed corporate losses by enticing them to spend more through pumping money by the government. The new government money is stated to allow more investment and growth.

It is a classic global method of nationalising losses and privatising profits.

There are apprehensions that the QE would be used by the large corporate to corner most of the funds to be released by the EU. The EU QE may open up avenues for Indian export. It is expected that over the next three years India’s exports is likely to rise with incremental demand from these countries. The recent Chinese move to accelerate its economy through domestic demand is also likely to benefit India. As China stresses more on its domestic economy, its wages and other costs are likely to rise. This might make Chinese exports expensive. It may open up avenues for India.

The moves may have further impact on oil prices. British Petroleum says the present oil price slump would continue for three years. But if the economic battle in Asia and Europe intensifies and Russia, which also faces a severe economic crunch, joins it, it might lead to a larger demand. The oil price may not remain that low.

India has an advantage. It has the largest workforce. Its disadvantage is jobs have not grown. The 2008 slowdown and consequent stimulus – corporate incentive – have exemplified that it only adds to corporate profits as it has done in the US and Europe. If it does not give stimulus, corporate globally carry out a malicious campaign to blackmail the government. It is a tough balancing act.

The NDA government faces tough situation. But it has to learn from the US, Europe and China that people have to be provided jobs. It is not possible for either the government or the corporate to do that. It has to look for how individual entrepreneurship could be incentivized.

The farms have to be integrated to create the quality of life. Rate cuts or QE are not long-term solutions. Europe, China and the US have exhibited it. India needs to set its course.

By: Shivaji Sarkar