Special Author: Suman Bery, Director of NCAER, New Delhi

The recession now present in advanced economies seems set to continue for a while yet.

The annual Neemrana conferences on the Indian economy provide a valuable opportunity to take stock of the state of the US and world economies, and the implications of global developments for the Indian economy.

The conferences are held annually at the Neemrana Fort Palace hotel in Rajasthan. They are co-hosted by NCAER and ICRIER. International (primarily US) participation is organised by the NBER, arguably America’s most respected network of academics engaged in research on issues of economic policy. The format is designed to encourage informal, off-the-record discussion on a range of current issues in economic policy.

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Special Author: Doan Hong Quang, World Bank, Vietnam

Vietnam began the year 2008 with high expectations. There was exuberance at the admission to the WTO and record growth of 8.5 per cent was recorded in 2007. The government set an even higher target in 2008, aiming for growth at 8.5-9 per cent.

Events took a seemingly unexpected turn. Signs of overheating, already evident at the end of 2007 amidst the asset bubble and rising inflation, became more and more visible towards the end of the first quarter.

The VN index lost almost 45 per cent of its value in just the first three months. The CPI was already running at 9.2 per cent for the first quarter, corresponding to a year-on-year rate of nearly 20 per cent, much higher than in neighbouring countries. Inflation rose from month to month and peaked in August, when the year-on-year rate reached 28.3 per cent.

To some extent, the price hike resulted from the surge of world prices, especially food and fuel prices. With a very open economy and a stable exchange rate, price rises in international markets were transmitted directly to domestic prices. Vietnam still maintains controls over prices of some essential goods and services, but the evidence shows that there were close correlations between the movements of international and domestic prices in controlled commodities.

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Author: Suman Bery, NCAER, New Delhi

With India’s state elections out of the way (and with a surprisingly favourable outcome for Congress revealed by Monday’s results), the central government was free to proceed with its two-part economic stimulus package.

Monetary policy measures (including fairly significant acts of regulatory forbearance) were announced on December 7, and ‘real’ side measures, primarily fiscal, on December 8. These measures were taken against the background of a deteriorating growth picture in the advanced industrial economies, and a sharp slowdown in certain key sectors of the Indian economy, such as labour-intensive exports, automotive and real estate.

If a rising tide lifts all boats, a falling tide brings out all lobbies. There have been plenty of voices arguing that what has been presented is ‘too little, too late’, in respect of both monetary and fiscal policy. Many of these critics cite the US; there, the emerging professional consensus is that policy has been irresolute and reactive, and that well-timed anticipatory action would have significantly reduced the growth and fiscal costs of financial deleveraging. Others cite the resolution passed by the heads of government of the G-20 in Washington last month, where all countries pledged to stimulate domestic demand (and to avoid protection). Here, the poster-child is the dramatic package announced by China well before the G-20 meetings, followed closely by the public works program announced recently by the Obama administration.

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Authors: Rajiv Kumar, Mathew Joseph, Karan Singh (ICRIER)

India had a dream run of five years during 2003-08 as the GDP growth averaged nearly 9 per cent annually, the best run over five years ever! The economy began to slow from the middle of 2007-08. A 9 per cent growth apparently could not be sustained: India’s potential rate of growth has been estimated by more than one agency to be around 8.5 per cent. As the economy overheated, the central bank tightened credit gently initially but more sharply since 2006-07. The economy began to slow down. Some of us had argued that the tightening was going too far and was an over-reaction to global inflationary pressures. No one foresaw the external shock arising from the global crisis which began with the financial meltdown in the US.

Now the interesting question is what would India’s growth rate have been in response to the policy measures without the global crisis as compared to what it is likely to be in the context of the on-going global crisis.

Our analysis suggests a sharp collapse in Indian growth this year. India would have grown 7.5 per cent (a slowdown from 9 per cent in 2007-08), had the global crisis not occurred. The global crisis is likely to bring India’s growth rate to below 6 per cent in 2008-09.

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