I’ve had a chance, over the past 10 days, to debate the details of what’s next for the macroeconomy with leading policymakers in both the eurozone/EU and India. I’m struck by some similarities. In both places, there is little or no concern that inflation will rebound any time soon. At least for people based in Delhi, there is as a result confidence that conventional policy can now act aggressively to cushion the blows coming from the global economy. In the eurozone, all eyes are on monetary policy and the same is true for India – both places have almost the exact debate about whether fiscal policy can do much more than it is already doing, given that government debt levels are already on the high side.
The discordant note comes from people based in Mumbai. They feel that Delhi does not fully understand that the real economy is already in bad shape. Sectors such as real estate and autos are hurting badly. Small businesses, in particular, seems to be bearing the brunt of the blow. The banking picture seems more murky, but is surely not good. And of course the Satyam accounting scandal could not come at a worse time.
Overall, my strong impression is that growth forecasts will need to be marked down for India and the eurozone. Both will likely cut interest rates further quite soon (and have space for additional cuts), but we should not expect much more from the fiscal side in either place. They will both start to look beyond standard macro policies - although India may make progress on this front sooner.
I also heard strong and reassuring opposition to protectionism – although, I must say the case against any kind of trade restriction comes through more clearly in India than in the eurozone.
Guest Post: Interpreting The Indian Election
This guest post was contributed by Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics. He notes two surprises in the outcome of India’s recently concluded election and suggests that India offers an alternative model of development for much of the world.
The results from the Indian elections point to a victory for the incumbent Congress party and its allies. Congress was led de jure by the economist-turned-politician Dr. Manmohan Singh and de facto by the Italian-born Sonia Gandhi, who is part of the Nehru family, which has been a force in Indian politics since the late 1800s and provided three Prime Ministers.
Two casualties of the election have been the Communists who resisted economic policy reform and opposed the nuclear agreement between India and the United States, and the Hindu nationalist party, the BJP.
Going forward, these results augur well for Indian economic policy reform. The Congress will be numerically strong enough not to have to rely on partners for political support and will be able to push through new policy initiatives.
Another likely consequence is that the Nehru family will probably provide India, not immediately but within the next couple of years, with its fourth Prime Minister—Rahul Gandhi, son of Rajiv Gandhi, grandson of Indira Gandhi, and great grandson of India’s first Prime Minister Jawaharlal Nehru.
These results are surprising for two reasons. Indian elections have traditionally been characterized by the phenomenon of anti-incumbency: ruling politicians get routinely thrown out of power. This government is the first in over 40 years that has been re-elected after a full term in office. Continue reading →
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