'Withdrawal of stimulus might bring a double-dip recession'

Q&A: Ajay Chhibber, Regional director (Asia-Pacific), United Nations Development Programme

As the global economic scenario is improving, Ajay Chhibber, regional director (Asia and the Pacific) for the United Nations Development Programme (UNDP), believes employment will be the major indicator to gauge the firmness of the economic recovery. In a conversation with Devika Banerji, he states that India avoided the worst of the economic crisis due to excessive spending prior to the crisis and calls it “accidental Keynesianism”. He feels Indian budget for 2010-11 should lay the roadmap for concrete economic reforms to keep growth on track. Excerpts:

What is the status of the world economy right now? How deep is the recovery?
Global economy is looking good because there is so much stimulus and the world is awash with liquidity. There are also fiscal stimulus packages in those countries where there was fiscal space like China and other countries in east Asia. All of that is playing its way through and, therefore, things are looking fairly positive in terms of certain economic indicators. But on the employment side, there are still question marks. While the rate of unemployment has slowed down, it is still not clear whether once the stimulus is removed there will be in a self-generated recovery.

Does apprehension of a double dip scenario still prevail?
Double dip is still a possibility but it is less of a possibility now than it was six months ago. Recovery is still very stimulus based. Withdrawal of stimulus might bring a double dip because the balance sheets of households are still heavily debt laden and unemployment is high and, therefore, purchasing power of those consumers are very different now.

Amid talks of recovery, the Dubai crisis took place. Do you think such regional fallout might continue to take place in the near future?
Dubai is pretty small in global terms but what it signals is more worrisome. It signals that monetary stimulus has hidden a lot of problems and some of these can surface. There may be a lot of lurking risks hidden amidst all this liquidity, and once it’s mopped out, such fallouts might happen. The small bubbles appearing all over Asia are still vulnerable and require a much more careful management.

How is India placed amidst all the crisis?
The stimulus has helped us to prevent the growth rate from sliding down. I call it a combination of strong monetary policy and accidental Keynesianism. We were already in high fiscal deficit before the crisis partly because of the Sixth Pay Commission and partly because of the election spending. We were already near 6 per cent fiscal deficit. Then, of course, when the crisis came, we added a little more. This fiscal deficit helped in stimulating the economy accidentally.

How should the Indian policy shape itself in the coming future?
I think the last Budget was clearly not intended to be a reform-oriented Budget and majorly a stimulant Budget. The monetary policy scenario was also not directed along that way. In the preparation of the next Budget, serious intent will be revealed. If things are again put off for the future, then it will be clear that the intent is not serious. We don’t expect that all the reforms will be done immediately because there are a wide range of reforms. But clearly having a roadmap should be our top priority. 

What is the major challenge that emerging markets in Asia face in this milieu of economic recovery and rising inflation?
It will not be an easy choice for India to tackle inflation in global commodities with a huge fiscal deficit. It might hurt us a lot especially as for some years we were a net food exporter but this year we are not. We are now a net food importer. So, we will be hit on both the food price and fuel price fronts.

Moreover, excessive monetary stimulus has put so much liquidity in the system and it is looking for places to get a quick return, and that money is coming to Asia and to the commodity markets.

For Asia, managing capital inflows is quite important because as part of the recovery you are getting a lot more capital inflows. Equity markets in most of the Asian economies have gone up by 70-100 per cent while the Dow Jones has gone up by less than 20 per cent. 

Does the crisis indicate an effective decoupling of Asian or emerging markets from the developed western world?
In the short term it is more difficult but the effort should be made to kick start a more public consumption based economy by spending in infrastructure and increasing social spending. Efforts should also be made to make social security system better. It would not happen overnight but even announcing a relevant scheme will have a certain affect and gradually shifts in the enormous savings of developing economies might take place. This will decouple emerging markets from the Western developed world. 

Intra Asian trade should also be promoted. Like Asean forms the base for wider Asian common market. Gradually a wider Asian market is emerging and Asean is providing the glue for this. Asean has emerged as a building block for a wider Asian common market and this will help in creating an alternative economic growth engine for the world. If the trend continues, Asian economy by 2050 will constitute more than half of world economy.