Chief Economic Adviser Kaushik Basu on Tuesday indicated that there could be a third global crisis coming in 2014 in quick succession to the financial crises of 2008 and 2011. This could have an impact on the Indian economy as well, he said.
“The year 2011 has been an echo of 2008 when sovereign governments in US and Europe stepped in to rescue banks that were doing badly, which put all the money generated by the government to rescue corporates. Public debt to GDP ratios went up to 100 per cent for Europe and 200 per cent for Japan while it remained 45 per cent for India,” he explained.
“Moreover, Spain, Italy and Greece were finding it difficult to borrow and were on the verge of default following which the European Central Bank (ECB) stepped in and lent $1 trillion to 800 banks, who in turn lent to governments. In the next three years, that is by 2014, it will be time to repay these loans. Since fiscal consolidation plans in these countries are poorly drafted, there could be another crisis coming,” Basu warned.
To tackle the coming crisis, India must boost exports in the next two to three years, he said. “At one point, China was the world’s workshop, which led to rising wages. India can come into the space vacated by China in manufacturing. A couple of policies would be needed to encourage this sector,” he said.
The global slowdown is very real and India is replicating this pattern, he said.
“Although the fiscal deficit has become large, the government has refrained from tightening the economy too much. The target next year would be to push hard for fiscal consolidation and prepare for fiscal contraction.”
This could create pain, Basu said, adding that it was a necessary step.