India has taken a number of measures to ward off recession originating in America and traveling to Europe and other advanced countries, especially the Group of Seven. Their leaders are meeting soon to come up with ideas to overcome economic crises staring them in the face. It has been admitted that the American banks have lost $1 trillion in housing debt defaults and credit card payment defaults. The US Federal Reserve has already given away $430 billion to save these banks out of its own total reserve kitty of $800 billion. It is possible that it is in the process of doling out $100 billion more, but beyond that, assistance will have to come from the American taxpayers' money that is the treasury and the US Congress will have to take a call on that. A number of hedge funds in the US, which had insured these debts, have folded up, and several banks in Europe had also tried to absorb American losses and have written down a few hundred billion dollars in their balance sheets.
How does this grim news affect India? India's liberalized and economy is no longer isolated from global trends as it might have been in the days of command and controlled economy 20 years ago. If America sneezes, the rest of the world, including India, catches a cold. Because of the weaknesses in America, the Indian rupee has been appreciating in value and in the past few years, the US dollar cost Rs 51, but today the same dollar can be had for Rs.40 and a few weeks ago it was just Rs.39. That makes India's imports cheaper, but the exports become uncompetitive. The Government has reduced import and export duties across the board to help exporters buy cheaper inputs and avoid raising their prices for exportable goods.
Even on the debt default fund, one aggressive Indian bank has taken a hit, a small one by world trends, but a hit no doubt. It has incurred a loss of $239 million and quietly taken and accepted the loss. Whether some Indian insurance companies collaborating with some world companies have also suffered losses has not yet been disclosed, but this cannot be ruled out because admission of such write downs and their publication would send alarm signals and hurt business prospects.
The American economic growth in 2007 was 1.5 per cent, but negative in the last two quarters. This year it is possible that it would grow by only 0.5 per cent or even less. That sends shivers to businesses and governments around the world because at $13 trillion a year, America is still the largest economy of the world. Its housing market is 15 per cent of the gross domestic product and demand for new dwelling units has dropped so much that unsold houses could be around 10 million, down from 15 million two years ago and new construction is minimal, possibly mainly in the area of housing fit to be demolished and rebuilt. Even as interest rates down by 3 per cent in the US, lending is much lower than ever. There are stringent checks on borrowers' capacity to repay and no open flow of money to all comers as was the case for a few years until the end of 2005.
The Reserve Bank of India has refused to cut prime lending rate even by 0.25 or 0.5 per cent because cheaper money could fuel inflation and increase food prices and make consumer goods costlier. Inflation, high retail prices and food shortages are something no government preparing for election in a year of less would like to have on its hands. That is why the Government has banned the export of most food items as well as steel so that there are no shortages and high prices in India.
Unseasonal rain in early April in Punjab, Haryana has damaged the standing wheat crop as harvesting begins in Punjab on April 13. That affected the normally colorful Baisakhi celebrations and exuberance in the granary of India. In parts of U.P. where harvesting began a little early, the stacked wheat has been damaged up to 25 per cent at least. Besides, the quality of the grain will be affected and the farmers will get less money from buyers and procurement agencies. Whether the government will waive off land revenue and provide financial assistance to farmers, already impoverished, remains to be seen. In early March, rain in coastal areas of South India had damaged crops and hurt the poor farmers. The crops were already slightly below expectations and wheat produce was believed to be one million below par that is less than last year's. Crop insurance has been talked about by the government for years, but it has not yet taken off. The result is that the farmers get little or no compensations after months of hard work.
Another factor that counts is the loss of food production in transit. In the case of wheat and rice, it is estimated at 6 to 10 per cent, but for fruit and vegetables the loss is much higher, that is 25 per cent to 40 per cent.
The first round of green revolution ended almost 15 years ago and food grain production has been stagnating between 190 million tons to 210 million tons a year, with a gain of one or two per cent in good years and a similar loss in the years of severe drought and torrential rains. New technologies, seeds, water conservation, desalination of land and some other factors have not been on the upswing. It is often claimed that the crop yield in China is per hectare in China is twice that of India's and that the food production in China at 400 million tons is also twice as much as India's. China's landmass is also twice that of India's and it is not yet clear whether farm land has been diverted to industry and urbanization as vigorously as in India. But it is known that Indian statistics calculate only food grains whereas Chinese are prone to adding up everything edible.
Lalit Sethi, -NPA
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