How Long Is The Tunnel?
Sometimes, I feel this is a very Indian thing. I spoke to friends in Dubai, who strongly believes that things will be back to normal soon. I also had discussions with Indians in the UK, and when I told them that the house prices are going down, they told me that this can not happen for too long and they would rather go out and try to buy houses now. I have this feeling that Indians are the most bullish nation on earth today. I can see people investing in new businesses in India and also about expanding capacity and hiring people. If this recession is about psychology, I am sure Indians will push through this global pessimism with undying hope and the economy in India will soon turn a corner.
The question is, of course, how real is this optimism. I am aware that Indians lived with a protected economy for many generations, and our ways of looking at the world is yet to change. The Indian middle classes are usually so protected and privileged that they have not seen major disasters first hand, neither a war nor global recession [in fact, nor a major natural disaster, which always have hit the poorer people]. For rest of the world, this recession may be bringing back memories of bad times, but the Indian middle class has no memories. Hence, while the assertions may be true, one does not know how real, and therefore sustainable, is the optimism.
The global economy, however, does seem to be turning a corner. There are some good results on the Wall Street, as my Indian friends point out, and stocks have started moving up the world over. Financial service companies have started afresh - it did not go unnoticed that Goldman Sachs has reported an unexpectedly good result and even said they would return the government money they took earlier. It also hit home that Citi group seems to be out of the woods. It is also apparent that the inventory levels are running low and production will soon start an upward trend. The commodity prices, still low, are showing signs of firming up, and this is good news too. In Britain, Gordon Brown's Housing Package possibly started working and the house prices seem somewhere near the bottom, indicating that this summer may be better than the previous one for homeowners. So, in summary, some of my optimistic friends are indeed right - there are green shoots of life in the horizon.
However, there are enormous global risks we face. The recovery is still fragile, and the risks of country defaults are very much real. The economy is currently on life support and chugging along somewhat stably, but that is far from being out of danger. The big risk, this summer, is of inflation. The major economies of the world have fought the credit contraction by flooding the market with cheap liquidity and by keeping interest rates artificially low. This has been helped by a general slamming of breaks on expenses - both by businesses and consumers - and slowing demand allowed the liquidity to flow in without an sharp upturn of inflation.
The policy makers must be very cautious right now and reign in the liquidity just when another bubble starts forming. This is about reading minds and being ahead in the game in the free market, which, as we have seen, they are not very good at. So, the real risk is that inflation may make a comeback. This will surely spoil the party and force everyone to run for cover.
Coming back to India, it also seems that the economy has got a little bit of extra support from the elections, when the black money flows in to the real economy and an extra investment of about Rs. 200 billion takes place, creating jobs and keeping everyone busy. It will be interesting to watch what happens in the immediate aftermath, especially if the resultant inflation kicks in at the same time.