Policy Parallels: Eurozone and India

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.

3 thoughts on “Policy Parallels: Eurozone and India

  1. What makes you think the banking situation is not good? The Indian banks didn’t have any exposure to sub-prime or derivatives on those?

    The real estate sector is surely hurting and so is the auto sector.

    I wasn’t aware of any dangers the banks faced?

  2. Actually, I would like to take Manshu’s point a bit further… kindly take a look at my post on Mostly Economics… the banks are minting money (Axis, HDFC bank results have been stupendous in 3QFY09)… it is just that banks are not passing on the benefits of lower interest rates on to the real sectors (by keeping high their prime lending rates, bank rates)… what can be done about this is the question…


  3. It is not just the real estate and the auto sectors that are hurting…more are…and they’ll all start revealing their problems in a few months. Most of them had actively pushed their respective “real” markets too much on paper. Growth figures for India surely needs to be re-evaluated… even the currently suggested figures seems a bit on the higher side. There is too much denial in the market.

    As far as the Satyam case is concerned, it should not come as a surprise for those who are in the know about the poor governance in many Indian firms. It’s sad but true, and a lot of the foreign business partners (especially American) are well aware of it. They are just trying to distance themselves from the ugly incident. The private sector in India has a lot in common with the Indian public sector.

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