Is the worst over? Too early to say

Stock markets across the world (including in India) reacted with euphoria following the US Federal Reserve chairman, Mr Ben Bernanke’s observation that the recession in the United States “could be over”, but this other significant statement — that unemployment or joblessness was increasing — appears to have been overlooked. The latter has far-reaching consequences as it could result in future defaults on home loans and credit card debts — in fact there is much talk in America now that credit card defaults could be the next major mortgage scam. The excess leverage in the US financial system is still there, and unless this is weeded out credit growth is unlikely to pick up. Much of the money given to banks has been parked back with the Fed in the US, just as banks in India park their surplus cash of over Rs 1 lakh crore with the Reserve Bank. While the euphoria globally can be understood after a very bleak year, the reality is much more sobering. What one sees in the US is a slowdown in the rate of decline, but that is because the economy has been on steroids. The trillion-dollar stimulus package is almost five per cent of America’s GDP, and the “cash for clunkers” to push sales of cars is what is keeping the economy going and creating a positive sentiment. The real stimulus, which is consumer spending and accounts for nearly 70 per cent of the US economy, is yet to pick up. America’s economic problems will not go away in a hurry. But in the gloom, Mr Bernanke’s statement on the recession was like the light at the end of the tunnel, which also sent ripples through Asia and Europe. While America’s stock markets are starting to look up after a long time, the emerging markets, particularly India, have been having a huge run-up for some months now. They had not been as badly affected as the Anglo Saxon economies. Some stocks on the Indian bourses have tripled from their bottom, and this is now a cause for concern. The bulls, of course, are optimistic about the continued upward journey of the Sensex and Nifty, even though there may be minor corrections along the way. Still, it is difficult to predict 2009, unlike 2008, when the global economies were in the dumps and transparently so, as liquidity had dried up and four to five of the giant banks and insurance companies had collapsed. The wreckage was visible. The revival signals are very conflicting even in India, though we have more positives than any other emerging market, excluding China. We have a stable government, a growth rate that is still enviable even though much of this growth is because of the fall in imports. Our exports, however, have yet to pick up and this is important as it is a labour-intensive sector and million of people depend on it for their livelihoods. Delayed rains in India have had an adverse impact on agriculture, but the government claims that it has enough food in its granaries to make up for the shortfall. Having said all this, there is no room for irrational euphoria, because inflation is starting to rear its head once again and is expected to reach five per cent by March 2010. This means some monetary tightening by December. Then there is also the need for winding down some of the monetary measures that the RBI had taken to pump in over Rs 5 lakh crores into the system since September last year.