India, Russia to Emerge Stronger among G-20 countries out of Current Meltdown

India along with China, Russia and South Korea would emerge stronger out of the current crisis as they enjoy strong economic foundations based on foreign exchange reserves, higher growth rates in GDP per capita and sound monetary policy measures, according to Assocham. Its study titled "India & G20: Economic fundamentals amid global recession" considered seven economic indicators relating to size of economy, spending power, tax structure, interest rate policy, budget balances, debt burden and foreign exchange reserves.

Ranking on these indicators (based on scores on a scale of 10) suggests India ranks fourth amongst the group of advanced and emerging economies (G-20) in terms of the seven key economic indicators determining the scope of policy intervention (both fiscal and monetary) and the impact of the global economic slowdown.

The current crisis, having being originated in US then spreading to Europe (with UK specially hit) and Japan has led these advanced countries low in rankings at 11, 12 and 13 respectively.

Looking at the severity of the current crisis, globally coordinated steps have been taken on both the fiscal as well as the monetary grounds to insure the unprecedented growth story of the world against the recessionary forces pulling down the growth substantially. However policymakers around the world are likely to take further actions to deal with the turmoil.

Although the economic fundamentals have been shaken drastically across the globe in the past few months, two of the three Asia's largest economies scores over other group countries on the aforementioned economic parameters which take them ahead of the other group members to devise effective action plans to deal with the crisis situation even efficiently. The study found India ranks fourth among the group of advanced and emerging economies (G-20) in terms of the seven key economic indicators determining the scope available for policy intervention (both fiscal and monetary) and the likelihood of revival from the aftermaths of the global economic depression.

Of the seven key economic indicators, in terms of the economy size (share of world GDP at PPP exchange rates) India ranks fourth among the group countries; preceded by Japan at third, China at second and the US at the topmost spot. Europe's largest economy, Germany, stands fifth. The size of the economy presents them a relative advantage over the peer countries to take robust action against the spreading downturn in the economic activity.

Defining the consumer spending power, the change in GDP per capita as the second economic indicator reveals the respective strengths of the G-20 nations to boost their rapidly slackening domestic demand. As a major part of the announced fiscal stimulus packages globally, a push to lift up the consumer demand is viewed as one of the priority area for the policymakers as it makes heavy contribution to their national output. According to the change in GDP (PPP) per capita for 2009 over 2008, India ranks at third position behind Russia (second) and China (first).

Among the advanced economies for 2008, Japan is likely to witness the maximum contraction in total domestic demand with Italy following at second place. US would register the minimal increase in demand to rank third with Germany and UK following at fourth and fifth place respectively, while for 2009; US would witness the largest contraction in total domestic demand followed by UK (second), Italy (third) and Germany (fourth) with Japan, at fifth place, to witness a mild increase in domestic demand.

Economic indicators relating to Budget balance as a percentage of GDP and Public Debt as a percentage of GDP, dictating the scope of the size and intensity of the fiscal measures to prop up the deteriorating domestic demand and to intensify efforts to check the unemployment situation in the country present difficulties for India. Among the G-20 countries, India ranks last (19^th) in terms of Budget balance as a percentage of GDP and 12th in terms of Public Debt as a percentage of GDP. Low ranking on these indicators presents India key challenges to announce heavy fiscal stimulus package as compared to China which fares better at seventh and third position for the two indicators respectively.

At a time of rising economic uncertainties, foreign exchange reserves have gained much larger importance in the present scenario.

In terms of foreign exchange reserves that present a cushion to protect an economy from speculative capital movements, China (at close to USD 2 trillion) tops the list with a huge margin over other group members. India is placed at fourth position behind Japan (second) and Russia (third).

As per the income tax structure in the G-20 countries, corporate tax rates as well as personal income tax rates have been taken to analyze the standing of the group countries. The prevailing income tax structure among the group countries has two way implications for the member nations: The corporate tax rate controls the movement of foreign corporations globally. It is considered to be a major barrier to entry in international economics. On the other hand personal income tax rate has a direct linkage to the household income hence defining consumer demand. In terms of corporate tax rates, India stands at 15th among the group while it occupies seventh position in terms of personal income tax rate.

On the monetary policy stance taken by the G-20 countries during H2, 2008, the interest rate easing policy among the member countries to address the falling economic sentiments has been an indication of the synchronisation of fiscal stimuli and monetary policy to tackle the worst recession since the Great Depression. India has made significant reduction in the CRR (350 basis points) as well as the repo rate (250 basis points) during the period. Measures of such magnitude places India on second position among the member countries in terms of the monetary policy stance. However, in view of the prudent interest rate policy followed by the RBI during the first half of 2008 to have a check on the soaring inflation, further rate cut measures could well be on the cards if the economic situation worsens.

UK and Australia have made biggest rate cuts in H2, 2008. China is third in the list behind India and Saudi Arabia, US, South Korea and the Euro area countries are next at fourth. Interest rates in US at 0-0.25 per cent and Japan at 0.1 per cent are at such low levels leaving little scope for further rate cuts. It appears that the advanced part of the world is going to witness zero interest rate scenario in the coming year. In terms of the fiscal stimulus packages announced by the G-20 countries, a push to core infrastructure activity, employment generation, tax rate cuts to boost consumption have been announced vehemently to minimize the aftermaths of the worst recession since the Great Depression.

Where does India stand in the comity of nations, in so far the Govt. support for revival of economy and exports is concerned is left to our policy makers and our enlightened readership.

Originally published in The Stitch Times: March 2009