The world economy resembles a train wreck right now—and it is hazardous to seek easy answers amid the wreckage. Too much has gone wrong, too much has still not been explained and too many of the old certitudes peddled by experts have been buried in the rubble.
It is particularly silly to pretend to have a clear idea about what will happen in the immediate future, when most are pretty clueless about what has just happened in the immediate past.
Illustration: Jayachandran / Mint
But there is one broad lesson that we should all learn: Future is never a mirror image of the past. British economist John Maynard Keynes had warned us many decades ago: “The inevitable never happens. It is the unexpected, always.”
That is a distinction that matters. The inevitable is about one karmic future: The price of stock A will keep shooting up, the value of currency B will keep falling, the growth rate of country C will continue to hover in the stratosphere. That was the world of early 2008.
On the other hand, the unexpected is about several conflicting possibilities: share prices can go up or down, currencies can wobble one way or another and economies can experience bubbles or recessions. This is the world of early 2009.
How will the Indian economy fare this year? Let us explore two extreme possibilities: sizzle and fizzle.
Also See Anniversary Special Issue
The optimistic view goes something like this: The steep fall in oil prices in a recession-hit world will be a huge plus for India, which imports most of its oil and also controls the price domestic consumers pay for fuel and fertilizer. Cheaper crude oil will shrink the trade deficit and reduce the subsidy bill.
In short, public finances will improve despite the economic slowdown.
A lower fiscal deficit will give the government ample room to increase its spending to support domestic demand. And it is how Indian consumers and companies spend and invest that matters more than foreign demand. India is not as heavily dependent as China is on net exports as a driver of economic growth.
The pessimistic view goes something like this: India’s growth surge since the early years of this decade was based on a huge rise in savings and investment rates. Higher corporate savings and lower government deficits helped propel the national savings rate to historic highs. That expanded the pool of domestic money available to finance a splendid economic boom.
Now what? The government deficit has expanded to levels not seen since the 1991 crisis. Company profits and cash hoards are wilting in the heat of the recession. Lower government and corporate savings will be a blow to those few brave companies that still have the guts to invest in a downturn. Lower investments will pull down the growth rate.
Meanwhile, the steep fall in economic activity and corporate profits will ensure that the government’s collections of import duties, value-added taxes and corporate taxes are anaemic. The deficit will balloon to levels that scare off foreign capital and push India closer to a full-blown macroeconomic crisis. We’ll be back to 1991.
Which way will the scales tilt? It is hard to guess even at the best of times. And these are special times when everybody lives under the shadow of uncertainty.
Economists like to draw a distinction between risk and uncertainty. Risk can be measured by looking at past trends.
Uncertainty cannot be measured—and what happened in the past leaves us with no clues about will happen in the future.
And let’s face it—despite the swagger of experts and forecasters who pretend to tell us about the future of the economy down to the second decimal point, everyone is basically clueless.
It’s not a comforting thought, but it is the brutal truth.
Which is why it is best to think in terms of Sliding Doors, a 1998 film where the story moves along two divergent paths because Gwyneth Paltrow catches a train in the first instance and misses it in the second.
A lot depends on which train the Indian economy finds itself in this year: the one heading into a dark tunnel or the one heading out of it.
Niranjan Rajadhyaksha is managing editor of Mint.