Sunday, May 9, 2010


From the village of Vijay Pura in the Indian state of Rajasthan, the global

financial crisis seems remote. The downturn is something people here read

about in the newspapers, according to Dhanna Singh, a member of the

Mazdoor Kisan Shakti Sangathan (MKSS), a union of activists and farmers.

The villages have welcomed back migrant workers from neighbouring

states, where people no longer find work twisting steel in Mumbai or

polishing diamonds in Surat. But, by and large, India's rural poor were

protected from the crisis by the same things that make them poor. If you

never had secure employment or many financial assets, you cannot lose

them to the crisis.

In Rajasthan, this resilience is also the result of government policy. The

National Rural Employment Guarantee Act (NREGA), extended to every

rural district in April 2008, is supposed to offer 100 days of work a year, at

the minimum wage, to every rural household that needs it. Rajasthan, a

parched state with a long history of drought-relief works, comes closer to

fulfilling that promise than anywhere else, providing 68 days of work on

average in the year to March 2008, according to a survey published in

Frontline, an Indian newsweekly. Vijay Pura is cross-hatched with hardpacked

roads built by people on the act's payroll. Thanks to the roll-out of

the NREGA and a hike in the minimum wage, "People here are feeling a

sense of security for the first time," says Shankar Singh of the MKSS.

The strength of rural demand is one reason why India escaped from the

crisis so lightly. Sales of many "fast-moving" consumer goods, such as

shampoo and toothpaste, are now growing faster in the villages than in

the cities. Rural India's purchases of chyawanprash, an ayurvedic paste

that eases digestion and bolsters the immune system, outpaced urban

India's by over six percentage points in the second quarter. And Maruti

Suzuki, India's biggest carmaker, more than doubled its sales in rural

areas in the year to March 2009.

But, having weathered the financial crisis, rural India must now weather

the weather. The monsoon rains, which feed India's unirrigated farmland,

have been fickle, inflicting drought on almost half of India's districts,

followed by floods in some areas as the monsoon departed. In a worstcase

scenario, India's agricultural output could shrink by up to 7% in the

fiscal year ending in March 2010, according to Citigroup. That would drag

India's GDP growth down to 5.2%, slower than in the thick of the financial


The drought will raise food prices, adding to inflation. India is already the

only big economy where consumer prices are rising faster now than they

were before the crisis. The price of pulses rose by 20% in the year to

August 28th; the price of sugar by 35%. That will force the Reserve Bank

of India to tighten monetary policy. Goldman Sachs expects it to raise

rates by as much as three percentage points in 2010. Spending on drought

relief will also add to the government's yawning fiscal deficit, which will

exceed 10% of GDP this fiscal year, if the budget gaps of the state

governments are included.

The monsoon once decided India's economic fate. Now it only influences it.

Agriculture's share of India's national output has dropped from 40% 30

years ago to 17% in 2009. Indeed, India's economy is now on the cusp of

an historic transition. In 2010 agriculture will account for a smaller share

of GDP than manufacturing: India's output of widgets will exceed its

output of wheat, rice, cotton and the other fruits of the land. The factory

will surpass the farm.

Return to the glory days

That is not just because agriculture is poised to shrink. Manufacturing,

which stagnated during the crisis, should recover smartly in 2010. It was

already growing by over 7% in July 2009, according to the index of

industrial production. Investment in new plant and machinery will get a

boost from the return of foreign capital inflows, some $44.1 billion in the

year to March 2010 and $52.1 billion the following year, according to

Rohini Malkani of Citigroup. About 35-40% of those flows will be foreign

direct investment. India's historians often hark back to the glory days of

manufacturing in the 18th century, when Indian artisans produced calicoes

and other fabrics of such appeal that Britain's spinners, weavers and

printers clamored (successfully) for import bans to protect their


During Britain's industrial revolution, however, Indian weavers were

"thrown back on the soil". India's first Prime Minister, Jawaharlal Nehru,

wrote that India's industrial destiny had been thwarted by imperial

economics. In 2010, thanks to a failure of the monsoon and a recovery of

the world economy, India's agriculture will at last give way to its

manufacturing prowess.

Not So Fast

Since April 2009 journalists have been writing of green shoots, economists have been reporting rising output and investors have gleefully pocketed big gains on

their equity portfolios. But for many households the good news

seemed to pass them by. Millions of jobs disappeared, home-loan

defaults mounted and corporate restructuring made the workplace

distinctly unsettling. Will the recovery that started in the final

months of 2009 bring wider relief in the year ahead? Perhaps not. Much of the lift in 2009 came from two sources. First , factories that shut down when global demand slumped reopened to restock nearly-empty shelves. Second, massive public-spending programs began to feed through, taxes were cut and central banks slashed interest rates.

But what happens in 2010 when the warehouses are full again? Production

could grind to a halt unless sales of fridges, cars and clothing pick up.

There is little chance of that happening until battered consumers shed debt

and recover their nerve, and that seems unlikely as long as unemployment

remains high. Governments, meanwhile, can't fund the recovery for ever.

Most central banks have cut interest rates as much as they can and

flooded the financial system with cash. Public spending can stay high, but

further increases would be unaffordable in most countries. So 2010 could

be a disappointment. The recovery will be a longer slog than many expect.

As usual, the story is brighter in the emerging world, although even here


(5) of (7)

there are nuances. China remains the place to watch. The collapsing

American and European economies flattened China's exports, but the

government produced the mother of all stimulus packages. That combined

with a lending boom (when China's bankers are told to lend, they lend),

was enough to keep the economy purring along at 8%: slower than

before, yes, but still impressive. Unlike most other countries, China can

afford to do it again in 2010, if necessary. To be sure, a state-directed

spending boom does not inspire deep confidence, and China's economy

remains unbalanced—too much saving, too little consumption. But those

long-term problems will not prevent another year of 8%-plus growth in


Plenty of other economies will benefit from China's success. Its statebacked

infrastructure projects are boosting demand for the exports of

other Asian countries, and commodity producers from Australia to Brazil

will be dragged along by the dragon's tail. India should also pick up,

assuming a better harvest than in 2009. Eastern Europe is a real worry,

burdened with too much debt and with too few solvent customers in their

west European export markets.

Two things will become clearer in 2010. First, in the rich world hopes of a

v-shaped recovery will be laid to rest; the excesses of the past seven

years will take more than a few good months to fix. Second, in the

developing world, government spending will keep the factories churning

while policymakers try to rebalance their economies for long-term growth.

In China, that means more pressure for reforms that will help persuade

consumers to start spending their hard-earned savings.

Policymakers in the West will mostly have to content themselves with not

making the situation worse. Take trade: the global economy would benefit

from a trade-liberalizing Doha deal, but as unemployment rises

governments will have their work cut out just to keep protectionism at

bay. Similarly with public spending: much as governments might love to

pump more cash into their fragile economies, ballooning national debts will

make that hard. And central bankers will struggle to do more than raise

interest rates modestly, as worries about recovery trump fears of inflation.

So, after hectic crisis-management, 2010 will be a quieter time for policy.

With luck that will allow governments to focus on their next big task—

drawing up credible plans for bringing their bloated budget deficits under


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