New Delhi: Is the global economy on the way to a recovery? Shumeet Banerji, CEO, Booz and Co., UK, says that not being in a negative zone doesn’t necessarily mean that economic growth has entered positive territory. Edited excerpts from an interview conducted on the sidelines of the India Economic Summit in Delhi on Monday:
Do the recent numbers on US unemployment mean that the slump may persist?
The fact that the unemployment numbers have peaked or are at this level doesn’t really surprise me. Unemployment numbers tend to lag the reversal of negative territory to positive territory anyway in a recession. I do believe that the recovery will be long and slow. In the US, it will probably be somewhat quicker but Europe and Japan will be difficult for a while.
There are three forces at work globally. The first is the scale of the fiscal stimulus in these countries, and what that has clearly done is to borrow forward some growth again. Some of it has been directed into consumer spending, for example, of the cash-for-clunkers programme paying for cars and that just borrows demand from first quarter next year, and that doesn’t really sustain.
Economic perspectives: Shumeet Banerji, CEO of Booz and Co. Rajkumar / Mint
I also think that credit contraction relative to 2007 is going to happen. The banks will be much more highly capitalized and will have much more constraints on liquidity and leverage and that means they will be slower to lend. Small businesses will suffer. The third issue is deleveraging—US and UK consumers in particular are highly indebted and in the last nine months we have seen the US savings rate swing by 900 basis points from minus two to plus seven, so that’s a trillion dollars out of the economy. (A basis point is 0.01 percentage point.)
Right at the peak of the bubble, US individual corporate government debt was 2.5 times gross domestic product (GDP). If that’s the level it settles at, that’s another $14 trillion out. Take those three things together and I don’t see a big growth story in the Organisation for Economic Co-operation and Development countries for a while. Having said that, the US is more flexible, is generally more innovative and I think will adapt quicker. I think there is much more structural rigidity in Europe and it will make it harder and longer for recovery. So while we may not be in negative territory, I don’t think that implies that we are in strong positive territory.
Have you been surprised by the resilience of the Indian economy?
Yes, I was pleasantly surprised and I must say that there are two or three features here that are quite important—the first is I think in the immediate aftermath, the macroeconomic and monetary policy management in India was very clear. Having said that, in retrospect, you can see very clearly why this was the case —India is relatively speaking quite heavily isolated in both products and financial markets, compared with China. It is quite heavily dependent on consumer demand in the country and what was a weakness or was seen as a weakness in the past is now seen as a source of strength. As a consequence of that relative isolation and relatively good macroeconomic management along with stability in policy, I think we have seen the benefits of that. So while two or three points of growth got knocked off because of the global crisis, still the underlying fundamentals of India haven’t changed.
You’ve said the growth dynamics are so strong that they tend to offset the irritants to doing business in India. Could you elaborate?
I was simply saying that in spite of these constraints, the country had a sustained record of 9% growth rates for over four or five years and that’s very impressive. The question is what could it be if you didn’t have these constraints and I think the answer actually is that it’s not clear because I suspect that when you peel the onion, one level down, what you see is that there’s a very high level of regional disparity in what’s going on here.
You’ve engaged with people on the policy side over the last two days. Do you get a sense that this time there is a clear hierarchical set of priorities?
You cannot have a structure where there are people living on a dollar a day in the same economy that created the most billionaires in 2007. At some stage this will lead to social unrest and it already has at a level that will simply jeopardize stability and growth and that’s just the political calculus that will have to be undertaken.
What impact will changing demographics have on economies?
What we see around the world is a very interesting divergence. You have much of Europe for example where birth rates have come down radically in the last 20 years as a result of which the dependency ratio is rising. And the other side of the spectrum is, of course, a country like India with a very large young population where the challenge is the conventional assumption of retirement where children play a large role in provision of old-age security. One thing we have learnt is that as economies mature, the speed at which the social traditions break down is surprisingly fast. So by relative terms, India has one of the largest (number of) old-age pensioners and there are going to be increasing tensions of provisions at that level.