Economists Barry Eichengreen and Kevin O’Rourke, in an article titled “A Tale of Two Depressions” published at VoxEU.org, take issue with the notion that the current recession in the global economy is not as bad as the Great Depression. They write that if the data is taken not just for the US but for the entire world, then the fall in world industrial production, trade and stock markets has been more rapid than during the Depression of the 1930s.
In India, the slowdown has so far been much milder than the downturn after the dot-com bust in the early years of this decade, although the 5.3% growth rate in the December 2008 quarter was greeted with much dismay. Many economists have said that the low growth rate was an aberration caused by the credit crunch. The consensus seems to be that while there’s some uncertainty about the March quarter, the economy has rebounded from its lows. If so, the economy has proved to be far more resilient than during the last downturn. For instance, after the dot-com bust, the lowest quarterly growth rates were during the fourth quarter of 2000-01, when the growth rate fell to 1.8% and in the third quarter of 2002-03, when it went down to 1.7%. Compared with that, a growth rate of 5.3% seems positively benign.
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So, did the dot-com bust affect us more than the current downturn? The difference was that manufacturing didn’t do as badly in the early 2000s as it did in the December 2008 quarter when it shrank 0.2%. The lowest growth rate for manufacturing during the last downturn was -0.1% in the fourth quarter of 2000-01. Agriculture did much worse, falling by 12.1% in the third quarter of 2002-03.
In fact, a comparison of the third quarter of 2008-09 with the third quarter of 2002-03 is interesting. Gross domestic product (GDP) grew by 5.3% in Q3 2008-09 compared with 1.7% in Q3 2002-03. But, as the chart shows, in the third quarter of 2002-03, the only sectors that did worse than in Q3 2008-09 were agriculture, the “finance, insurance, real estate and business service” component of the services sector and “community, social and personal services”, or government spending. That’s why there’s so much talk of rural resilience in the current downturn and much more concern about sectors such as manufacturing and construction. There’s also the huge difference the government stimulus makes—community, social and personal spending was up 17.3% in the December 2008 quarter, compared with 3.8% in the December 2002 quarter. Much of this spending has been for public sector employees and in the rural areas, leaving large numbers of urban people unaffected. Perhaps our unconscious urban bias, as well as the much worse global environment, is the real reason for the current pervasive sense of gloom and doom, despite the GDP growth rate being much higher than during the dot-com bust.
Yet another reason why the slowdown feels much worse today may be because growth has slowed from 9.7% in 2006-07 to around 6.5% or so, a drop of at least three percentage points in two years. In contrast, the deceleration in growth was more gradual in the early 2000s, from 6.7% in 1998-99 to 4.4% in 2000-01 and from 5.8% in 2001-02 to a low of 3.8% in 2002-03. Maybe that’s why the memories of the mid-1990s, when GDP growth fell from 8% in 1996-97 to 4.3% in the following year, are more painful.
In the stock market, while the gap between peak and bottom after the tech wreck saw a drop of 58% for the Sensex, this time the drop (assuming the lows of last October holds) was 64%, which while also being much faster, underscoring the much closer global links of the stock market and the importance of manufacturing companies in the market. The fall in exports, too, has been much sharper this time.
But overall, in contrast to the developed countries, the current situation in India is very different. Incidentally, during the Great Depression, according to calculations made by economist Angus Maddison, India’s (undivided India at that time) GDP went up by just 0.4% between 1929 and 1933. Some of the worst years were 1931, when GDP contracted by 0.7% and 1937, when GDP fell by 1.6%. But GDP contraction was quite usual for India in those days. The end of the second world war and the pre-independence riots took a bigger toll on the Indian economy, which shrank by 5.3% in 1946, according to Maddison’s numbers.
Graphics by Ahmed Raza Khan / Mint
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