"Sensex crosses 25,000." Indian investors savoured that headline no end on May 17, 2014, just as they welcomed the prospect of achhe din following the unprecedented Bharatiya Janata Party general election victory. It reappeared briefly around midday last Friday, but brought little cheer, because the index was limping to recover from a four-month low it had touched the previous day. Punters who had confidently anticipated the Sensex to cross 30,000 by year-end were not the only ones unhappy. In a country where agreement on any matter is virtually impossible, the prevailing general consensus is that achhe din are nowhere in sight.
When the United States sneezes, the world catches a cold, so went the folklore of the last century. In the first week of the 16th year of the new millennium, the world seems to have caught severe pneumonia, or worse, as China had the flu. The Dow Jones index has fallen by 5.2 per cent since the start of the year, its worst such yearly opening since 1896. The continued buoyancy in the American economy as reflected in the announcement Friday of yet another monthly addition of over 200,000 jobs announced did nothing to dispel the gloom and doom that smothers the global economy as tightly as winter smog does the Delhi and Beijing citizenry.
What were seen as topsy-turvy developments in 2015 appear to be continuing in the new year too. Take oil prices, for example. They are hurtling into a bottomless black hole. "Surely they can't get any lower," we all thought late last month when they fell to $35 a barrel, a little under a quarter of the high of $145 they had touched in mid-July 2008. Has any other commodity price ever suffered such a drastic drop in so short a period? This columnist is not aware of it. But wait, on Friday, January 8, the price slipped below $30, with oracles' predictions of a fall to $20 or lower soon reaching a crescendo.
What accounts for this? As always, analysts' explanations are dime a dozen, but none of them convince anybody. And this is not the only economic parameter whose behaviour does not conform to accepted wisdom. China, with its gross domestic product, or GDP, still growing at six per cent annually, and India, at 7.5 per cent, albeit by their own statistics, cut prime interest rates to boost their economies; but the United States, with a relatively anaemic rate of under three per cent, hikes its interest rates, with the Federal Reserve under Janet Yellen decreeing an end to stimulus. Europe as a whole, with even more parlous growth, sings the chorus of containing government spending, but the European Central Bank under Mario Draghi declares it will continue with its quantitative easing. Poor Arun Jaitley is caught in the horns of a dilemma: If he were to prime the Keynesian pump to counteract the impact of private investment stubbornly refusing to pick up, he crosses his own (and and the Fiscal Responsibility and
Budget Management Act) red lines of budgetary deficits and risks the wrath of the rating agencies.
Sound economics says countries must not expand money supply in excess of that of goods and services lest it cause inflation. But Americans keep raising their public debt and print ever more greenbacks and T-bills that the world, especially the otherwise inscrutable Chinese, lap up. Yet US inflation stays at under two per cent a year. The dollar gains against most currencies. China having only just gained the vaunted reserve currency status for its yuan, has to devalue it almost immediately thereafter. The rupee lost five per cent over the last year, but that did not stop our exports from falling month after month through the year.
What about private investment? Market caps of most brick-and-mortar, nuts-and-bolts, smokestack companies steadily head southwards, but taxi aggregators, e-commerce retailers, social media companies, many of them years away from any profit, receive astronomical valuations from angel and retail investors alike. The amazing Amazon makes a small profit, but Jeff Bezos' wealth leapfrogs. Dotcom is what appears in one's e-mail id, not the bubble that burst two decades ago, the world seems to think.
A learned economic adviser of a leading financial institution delivered a rather mundane and largely unintelligible memorial lecture on global economies last weekend. "Prices will continue to fall, unless of course they rise" is only a slightly exaggerated one-line summary of his speech. We live in interesting times!
George Soros says that the present reminds him of 2008. Surely that brings no joy! The world, like Alice, is stumbling, through this Mad Hatter's (economic) Tea Party, looking for any explanation that sounds rational, but finding none. In 1989, as the Berlin Wall came down and the Soviet Union marched towards its inexorable collapse, Francis Fukuyama provocatively asked whether the end of the Cold War actually signified the end of history as we understood it. Should the collapse of oil prices and the perverse lockstep movements of economies lead us to question whether this is the end of economics?
The writer taught at Indian Institute of Management, Ahmedabad, and helped set up Institute of Rural Management, Anand
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
