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Why don’t you take a bit of our inflation?

Updated: Jan 21, 2011, 16:53 PM IST

Rijo Jacob Abraham

Corporate honchos, et al from all-over the world will leave their limousines and descend on the snows of Davos to see and to be seen. With around 200 odd sessions crammed into five days World Economic Forum 2011, is going to be a controlled-chaos this time too. The theme this year is ‘shared norms for a new reality.’

Implicit in the very theme is a notion that the world is not exactly flat and there are still a few walls to climb especially after the Great Recession. Before the crisis many believed that the current account and deficit in the US induced by consumption splurge especially in the housing could never lead to the crisis. Emerging Asian economies would not just serve as an export platform but would help the global economy tide over any crisis through their domestic consumption.

Prior to the crisis, the CII sponsored ‘India Everywhere Campaign’ at Davos had made India even a star-attraction. In 2006 India for the first-time led a high-power partnership team to showcase India’s prowess at a global stage. Highlights of the campaign included a cultural extravaganza and even an Indian Happy hour at hotels across Davos, serving free food and spirits to the delegates. India was the darling of the developed world.

Things have changed a lot since then. China and India often dubbed the “twin jet-engines”, have shown signs of flattering. These engines are fast running out of its fuel – man power. The rampant strikes last year across China highlight this. The workers in Asian region are also getting more demanding.

Inflation, a direct result of this, is another issue which both the countries are grappling with. China’s GDP which is 53% depended on exports is looking inwards to promote growth through domestic consumption.

India’s economy which is 21 percent depended on exports has surging inflation. Indeed India’s Finance minister Pranab Mukherjee’s stance that inflation is a direct result of growth definitely has some ring of truth to it in this context.

The comparatively low GDP figures after the global crisis also cast doubts over the ‘decoupling Asia’ from the rest of the world. Statistics show that India’s recession had its impacts in Textile and Metal industries the most.

In India there is also acute shortage of skilled man-power at entry and middle-level in the corporate sector. Not to mention IT sector, 75 percent of its revenues from the US remains a main area of concern.

Effects of recession in India were to a large extent smoothened by domestic consumption at home. And to a lesser extent in China, thanks to their economy which is more depended on exports. The Asian economy is buoyant. But it is not buoyant enough to keep the entire world afloat.

The high capital inflows from developed countries to emerging markets seeking greener pastures has led to a excess accumulation foreign exchange reserves when service exports, when foreign remittance was already making up for any current account deficit.

An increased FII flows has contributed to a rupee appreciation which has made the exports less competitive. (This is despite the central bank’s efforts to check appreciation by buying dollars.) Much of the FII enthusiasms in Indian market is due to the quantitative easing (loans with zero percent interest) given to the corporate by the US.

This has led to a massive surge in the Asian stock asset prices. The high prices of many Asian stocks are due to knee-jerk reaction by foreign funds rather than based on the companies profit or its fundamentals. In short, this has given rise to a very choppy and bubble-causing stock-market in Asia, especially India.

Problems at home have made the Asian giants a bit reluctant to accept any trade negotiations that would jeoparadise their own economy further. As countries like S Korea remains adamant on the concerns of its farmers, a breakthrough is unlikely in the Doha Round of WTO.

To expect these countries to raise their currency value while providing cheap loans to corporate is preposterous. Last year team Obama was very thinly represented at Davos. After raising H1B1 visa fee and not relenting on the farm-subsidy, can we expect anything more from the US?

There seems to be a realization that it is the world that needs India more than India needs the world. This is amply illustrated by the fact that Chanda Kochhar of ICICI Bank is one of the six CEOs to co-chair the Davos meeting.

But what is possible amid the flurry exchange of business cards at the corridors of the World Economic Forum corridors is at least an agreement to export a bit of inflation. The major European economies are reeling under deflation. A wage rise here in Asia could easily transfer inflation over to these economies.

¬¬Speaking at a University graduation function the Reserve bank of India governor D Subbarao hinted at this. "When I meet other central bank governors they tell me: Why don`t you give us a bit of your inflation? That`s how desperately they want some inflation and how desperate we are to control our own inflation." US has indeed benefitted a wage rise in India.

Though an increase in wages could spur up the living-conditions India, fears are that it may add to the inflationary woes. But the prices of food grains are income inelastic – (that is an individual may not consume more just because he can afford to.) Graphic indicators point to the food price movements have shown a declining trend in the last quarter of this fiscal. So a minimum wage increase (or an increase in wages through MNREGA) and an increase in corporate salaries should not be a interpreted to spiral up inflation. This could be a conversation-starter as far as India is concerned.