Global Economic Meltdown

The forecast is grim: the world’s largest economy, the United States, could slip into recession. Goldman Sachs’ chairman Lloyd Blankfein told the US television network CBS on May 15: “If I were running a big company, I would be very prepared for it. If I was a consumer, I’d be prepared for it.”

Blankfein reflects increasing concern among world business and political leaders that the global economy faces a double threat: high inflation and low growth, the classical formula for stagflation.

Meanwhile, the world’s second largest economy, China, is undergoing its worst economic crisis in twenty years. Not a single car was sold in Shanghai during its April 2022 lockdown. A year ago in April 2021, 26,311 cars were sold in Shanghai, underscoring the severe impact of the draconian lockdown.

Chinese GDP is estimated to have fallen by 0.8 per cent in April with partial lockdowns in Beijing and other parts of China as the country relentlessly pursued its zero-Covid policy.

The retail sector has been among the worst hit. According to China’s National Bureau of Statistics, retail sales plunged 11.1 per cent in April. Factory production declined 2.9 per cent. But the real worry for China’s policymakers is the steep fall in economic parameters in key regions. For example, industrial output in April shrank 16.9 per cent in China’s northeast and 14.1 per cent around the Yangtze River Delta that incorporates Shanghai.

For India, the disruption caused by the Russia-Ukraine war has stoked wholesale inflation to an 11-year high of 15.1 per cent. Retail inflation is trending close to eight per cent. Crude oil prices remain high, forcing the Reserve Bank of India (RBI) to dip into its foreign exchange reserves to cushion the rupee’s fall against the rampaging US dollar.

Global currencies have been whiplashed as well by the dollar, its safe haven status bolstered by the US Federal Reserve’s accelerated taper programme. The flight of foreign institutional funds from India’s stock market has added to the RBI’s worries: its forex reserves had scaled $640 billion before the Russia-Ukraine war. They have declined steadily to below $600 billion. 

The heat wave in north India has meanwhile struck a cruel blow to India’s wheat stocks. Despite the government’s partial ban on wheat exports, food stocks have fallen. Wheat production is likely to plunge from the targeted 111 million tonnes to as little as 95 million tonnes and possibly even lower.  

The partial export ban was necessary to ensure adequate stocks for India’s public distribution system (PDS). The ban has upset the West which is reeling from high food prices following Russia’s blockade of Ukrainian ports. Ukraine is Europe’s food basket and the world’s fifth largest wheat exporter. India of course is the world’s second largest wheat producer after China.

The West is used to calling the economic shots. So when India, in a perfectly logical move to safeguard its citizens’ food security, imposed its partial wheat export ban, agriculture ministers from the G7 strongly criticised New Delhi’s decision. Speaking in Stuttgart, Germany’s agriculture minister Cem Özdemir said: “If everyone starts to impose export restrictions, or to close markets, that would worsen the crisis.”

It was a replay of Western outrage when India abstained from United Nations resolutions condemning Russia’s invasion of Ukraine. It took a firm riposte by India’s external affairs minister, S. Jaishankar, a former Indian ambassador to both the US and China, to slam the door shut on Western hectoring.

It again took a robust stand by India to cauterize European and American complaints about the wheat export ban.

The West’s angst over the continuing Russian-Ukraine conflict damaging their economies was encapsulated by Andrew Bailey, governor of the Bank of England (BoE). Bailey admitted in an interaction with British MPs that he felt “helpless” about inflation and Britain’s economic prospects. Analysts in The Daily Telegraph summarised Bailey’s anxiety thus:

“Helpless is the word Andrew Bailey used to describe how he felt amid runaway inflation which has battered household budgets, leaving many consumers feeling the same.

“On the eve of the publication of the latest labour markets figures, Bailey admits that the Bank of England was surprised by the persistence and scale of the drop in the size of the labour workforce and the increase in economically inactive individuals.

“As such, the Bank has now lowered its projections for labour market participation in its Monetary Policy Report – which is used to devise measures to rein inflation back to the Bank’s target level of 2 per cent.

“Andrew Bailey pointed to the difficulty in predicting impending long-Covid and the accidental phenomenon on workplace participation.”

India is relatively better placed to face the global economic crisis than the West. While inflation is a worry, Indian GDP is expected to grow between 7.4 per cent and 8.2 per cent in 2022-23, according to Sanjiv Bajaj, President of the Confederation of Indian Industries (CII).

Obviously, much will depend on crude oil prices. At over $100 a barrel, they could pare Indian growth by around 0.5 per cent. In comparision, China’s GDP growth rate in 2022-23 is likely to fall below 4 per cent, well off the targeted figure of 5.5 per cent.

Indian exports meanwhile remain a bright spot. Merchandise exports in April 2022 crossed $40 billion. Commodity inflation, especially of petroleum exports, does not alone explain the buoyancy. The Production Linked Incentive (PLI) scheme and free trade agreements (FTAs) with the United Arab Emirates (UAE) and Australia have turbocharged exports. The 2022-23 target for merchandise exports is $480 billion. That could be exceeded if the current trajectory is sustained.

An important lesson the Russia-Ukraine war has taught India is that the era of appeasing the West is over. Enlightened self-interest must prevail over the traditional idea that India must bend over backwards to tailor its policies to please other countries.

India must stop seeking validation from others, especially the West. The rich world is interested in India because of India’s large and growing consumer market and business potential.

Western companies seek globalisation when it profits them, but as the abrupt exit of hundreds of European and US multinationals from Russia has shown, ruthless self-interest governs their actions.

So henceforth must India’s.