The state of the global economy in 2012 will depend on the delicate balance between a weak Europe and a recovering US.
The European mess is likely to continue. The euro project has survived many scares; there could be a few more in store in the months ahead. Europe as a whole could already be in recession. Many governments in the peripheral countries are borrowing at interest rates that are out of sync with underlying growth rates. European banks are short of capital.
The news from across the Atlantic is far better. The year began with fears that the US was headed into a double-dip recession. The latest data on business confidence, new residential construction, consumer spending during the holiday system, business confidence and jobless claims suggest that the largest economy in the world is stronger than what seemed possible till even a few months ago, when the political deadlock on raising the federal debt limit raised fears of a default.
The world economy is still not out of the woods, but there are glimmers of hope that the prospect of a total collapse like the one we saw at the end of 2008 is now a receding possibility. That is the good news. But the rich countries continue to a burdened with a debt overhang in household and sovereign balance sheets. Three years after the credit bubble burst, deleveraging has still not gone far enough. It will be a few more years before debt burdens are reduced, in all probability through a combination of haircuts, inflation and (insipid) economic growth.
Generic shoot of ABG Shipyard facility in Surat, Gujarat
This is the grey background against which India will need to reignite its growth engines, especially domestic investment activity. The task does not seem easy, especially given the mood in corporate board rooms and the growing mess in public finances. There is a risk that one more year of drift will damage the medium-term prospects of the Indian economy. A fiscal push is not possible given the growing deficit. The more sensible option is a reforms push to improve business confidence and lower inflation to improve consumer confidence.
To what extent does the gloom in the global economy affect India? Tell us at email@example.com