By Shivaji Sarkar
It is a big economic exercise. People know of the World Economic Forum meet at Davos in Switzerland. They do not know of quantitative easing (QE) of Bank of England, European Union and rate cut of People’s Bank of China (PBC) that have happened in matter of day. Even Japan is considering one.
One common thread in these exercises is the realisation that the world economy may be in peril without increasing jobs. It cites the QE by the US, which has stimulated job growth to around 3.5 lakh. In short, it means central bank buys bonds from investors such as banks or pension funds using money it has printed or created electronically. This increases money supply.
Growth in the Eurozone – the 19 Euro using countries – has slowed down in recent months. Some of these are in recession. Europe is also facing the spectre of deflation, when prices fall. Its inflation fell below zero in December. The World Bank (WB) says it might cause severe contraction of the economy as people would stay away from the market expecting further price fall.
The WB opinion is faulted. It does not take into account the growing profits of large corporate. The corporate cartels have increased European commodity prices beyond the affordable levels. They have also cut on jobs further accelerating the problem. So the solution has to be there. The WB has been advocating QE as they had done for the US two years back. The Bank of England had taken to it. Now just as the WEF begins, EU has done it. It means Eurpean Central bank would buy Euro 50 billion bonds a month till 2016.
It is a clever WB ploy to maintain corporate cash books happy by putting pressure on the governments, who finance the supposed corporate losses by enticing them to spend more through pumping money by the government. The new government money is stated to allow more investment and growth.
It is a classic global method of nationalizing losses and privatizing profits.
Europe, however, has added one quality to its programme. It has not taken the route of lowering interest rates – a US favourite. It argues lower interest rates encourage people or companies to spend money rather than save. Higher interest rates encourage savings and add resilience to economy.
So will the Eurozone revive? German chancellor Angela Merkel does not believe in it and did not support it. Greece, deep in debt, has put conditions and is mulling going back to its own currency. Greece in reality has cut its government spending. It is not easy solution.
The UK says the Bank of England has helped its economy despite job cuts and rising inflation – a prescription it has adopted for growth.
Yes, Euro 50 billion a month or a trillion Euro in about a year is a lot of money to boost the economy. If it does it would mean a lot for India too. The EU has opened up avenues for textile and fruit imports from India. It is to be seen how much it benefits India.
There are apprehensions that the QE would be used by the large corporate to corner most of the funds to be released by EU. It is doubtful that it would increase quality jobs. Despite about recent 3.5 lakh additional jobs in the US, most of it has been termed of poor quality. It means the jobs have lower wages and most jobs are either casual or temporary in nature.
The EU QE may have its impact on India. It is likely to open up avenues for Indian export. It is expected that over the next three years India’s exports is likely to rise with incremental demand from these countries.
The recent Chinese move to accelerate its economy through domestic demand is also likely to benefit India. As China stresses more on its domestic economy, its wages and other costs are likely to rise. This might make Chinese exports expensive. It may open up avenues for India.
The 0.4 per cent PCB rate cut comes in the wake of recent slowdown to five-year low growth of 7.3 per cent. Many analysts think a key motivation was the recent sharp fall in the value of Japenese yen, which impacts Chinese exports. Simultaneously ECB president Mario Draghi said that he would continue to “step up the pressure” and increase its efforts to stimulate the struggling economy.
The moves may have further impact on oil prices. The British Petroleum says that the present oil price slump would continue for three years. But if the economic battle in Asia and Europe intensifies and Russia, which also faces a severe economic crunch, joins it, it might lead to a larger demand. The oil price may not remain that low.
India has to remain cautious. It has high hopes from WEF, where 2500 global leaders and economic experts meet. It may deliberate on many issues, but may not be able to set the global course.
India’s NITI Ayog would be left with difficult questions. It has to prescribe independent ways to steer the economy. It has to suggest ways to cushion the economy from either an eastern or western onslaught. It may also have to mull how to generate domestic demand, how not to cut interest rates and still push the growth.
India has advantage. It has the largest workforce. Its disadvantage is jobs have not grown. The 2008 slowdown and consequent stimulus – corporate incentive – have exemplified that it only adds to corporate profits as it has done in the US and Europe. If it does not give stimulus, corporate globally carry out a malicious campaign to blackmail the government. It is a tough balancing act.
The NDA government faces tough situation. But it has to learn from US, Europe and China that people have to be provided jobs. It is not possible for either the government or the corporate to do that. It has to look for how individual entrepreneurship could be incentivized. The farms have to be integrated to create the quality of life.
Rate cuts or QE are not long-term solutions. Europe, China and the US have exhibited it. India needs to set its course.