come down from the earlier anticipated 7.5% to 7%. Mr. Pranab Mukherjee acting on behalf of the recuperating PM backed this by saying that the economy will clock 7% rate of growth.

In contrast to this little is wrong with Indian economy stance, President Obama in his inaugural speech talked of being `in the midst of a crisis’, not only because of the war but because, `Our economy is badly weakened…’. If India clocks a 7% rate of growth, it will possibly be the fastest growing economy in the world in 2008-09. Now that the US economy has is shrinking even faster rate (3.8% last quarter and 5% this quarter), President Obama again said that the crisis is deep. He has suggested that action has to be immediate and quick.

In India, policy makers are repeatedly asserting that the economy will only slow down slightly implying that no major steps are required. So, even though two stimulus packages have been announced earlier, a huge supplementary budget was presented in October and RBI has tried to increase liquidity rapidly (without much success), overall, the government is not intervening aggressively enough to boost the economy. This is in sharp contrast to the aggressive interventions by not only USA but all the other major regions and economies of the world –Europe, Japan, Britain, China and SE Asia.

It is being argued that India is not dependent on exports so the effect of global slow down would be limited. It is said that we are dependent on internal consumption generated demand and that is not affected by the global crisis. Further, it is being suggested that our banks are well capitalized and did not participate in the creation of the toxic assets that have plagued the major banks in the world that had resorted to high leveraging. As such, they are not expected to be adversely affected by the ongoing global financial crisis. It is also argued that while the urban areas are linked to global markets and will be affected by the global markets, the rural areas constitute a huge market and are insulated from the global market so demand would be maintained.

These arguments are a throw back to the decoupling theory which has been discredited long back but is making its appearance in a different garb. If these explanations hold then the government is justified in not taking drastic steps as other economies are doing. However, if these assumptions are incorrect and the government is only posturing because of the coming elections then we are in deep trouble because if correctives are not applied in time to salvage a deteriorating situation the new government would confront a deep crisis.

It is true that agriculture employs about 50% of the work force and rural population is 72% of the total population. However, now agriculture only generates 17% of the total output of the economy. Even if it grows at twice its recent trend rate of growth of 2.5%, it can only add 0.4% to the growth rate of the economy. If industry slows down from about 10% to about 3% then that would lower the rate of growth by 1.4%. Finally, if the services sector slows down from around 10% to about 4% as appears to be likely with trade, real estate, business services, transportation, other services, etc. slowing down while very few are maintaining growth like, telecommunications, banking and health services, then the rate of growth of the economy maybe in the range of 3-5%. In fact, IMF has cautiously lowered its growth forecast to 5% in contrast to the Indian government sticking to the 7% figure. In brief, the rural market is not very large and can hardly compensate for the decline in the urban markets.

India’s share of exports in its GDP is about 20.0 % in 2007 according to WTO tables. The comparable figure for China is a whopping 40.8% and that for Germany is 46.5%. No wonder as soon as the US recession started, these economies landed in trouble. Germany is in recession and the Chinese economy has drastically slowed down. So, it is correct that we would not be affected as much as Germany and China. However, for EU as a whole the comparable ratio is 16.3% and for Japan 19.2%, both less than India’s and both are in recession for two quarters. Does that give us any hope of escaping a rapid slow down?

The Japanese banks were not exposed to the toxic assets like those in US and Europe and yet they face a crisis. As the profitability of major corporations dips, defaults will start and then the bad loan portfolios of the presently healthy banks will take a hit. For instance, Toyota for the first time in its 7 decades of existence has made a loss. Many other big corporations are reporting that in the latest quarter, their profits have either dipped sharply or have turned into losses. This is also true for the Indian Corporates with Tata steel, Reliance, Maruti, etc. seeing steep declines. Add to that the sharp decline in prices and activity in the real estate markets and one realizes that defaults will rise in India too.

Unemployment is rising rapidly globally and ILO is projecting a loss of 50 million jobs in 2009. These are mostly middle and upper middle class factory workers and white collar workers who used credit cards and bought against loans on which they are paying EMIs. There is a crisis brewing there. Banks have already turned cautious in India and are not lending as freely as they did earlier and the cabinet secretariat has asked them to remain cautious. This is protecting them from bad loans but when there is a steep down turn then is anything safe, like, witnessed in Japan?

Consumption of the well off sections has taken a sharp down turn so Reliance retail, Subhiksha, Spencers, etc., are closing many of their outlets. Sales of automobiles, air travel, etc., have been affected. So, internal consumption cannot be as robust as is being claimed and especially in the face of rising unemployment.

However, help is on the way from a rising fiscal deficit (by up to 5%) due to a reported drastic fall in tax collections and increased expenditures but this is likely to be off set by the rising trade deficit and the falling investments due to the slow down and growing uncertainty.

All this raises doubts about India achieving 7% rate of growth this year. In the event, as the economy performs worse than anticipated, government’s and industry’s calculations are likely to go wrong. The contrast in action planned by other major economies is sharp. We are postponing necessary correctives, like, employment generation, accelerated rural development, preventing industries from closing, etc. Are we are inviting a worst disaster by being ostrich like.

Dr. Arun Kumar is the Coordinator of the EXIM Bank-JNU Library in Economics. He is teaching Economics in Jawaharlal Nehru University since 1984. He has been the Chairperson of the Centre for Economic Studies and Planning of JNU, Vice President and Acting President of the Indian Academy of Social Sciences (ISSA). This article was first published in The Tribune, February 3, 2009.