Even if the $ 700 billion US government bailout package gets passed by the US Congress in its current open-ended form, the big question is how much Wall Street's woes will spill over into Main Street, and to what effect. Although the US financial crisis began 15 months ago, the US and indeed the global economy as a whole have confounded most pessimists and managed so far to escape sliding into recession.
The big puzzle, and source of hope for optimists, is US growth at 3.3 per cent in the last quarter; despite unemployment rising to 6.1 per cent of the work force, personal consumption growth has doubled compared to the year's first quarter. Perhaps the explanation lies in the federal fiscal stimulus of $ 150-200 billion, which could account for much of the increased consumer spending. Since that was a one-time boost, and with parts of Europe and Japan already slowing and perhaps slipping into a recession, the US economy too could find itself in trouble.
The bill for the financial crisis has already crossed a trillion dollars (7 per cent of the US GDP), and the pessimists say it could become twice that. Meanwhile, credit continues to freeze up as de-leveraging continues its course, capital will be scarce as financial firms need to recapitalise, and on top of it all, there are doubts about whether the government bailout package will do the trick.
On the contrary side, the dollar has held up well, and the US stock indices have not crashed as some had feared -- so confidence in the US economy is bearing up despite the headlines.
Still, the impact on business will be felt. Most people expect US house prices to fall further, and the house price correction has barely begun in Britain. Since everyone expects a further price fall, transactions will be few and therefore the crisis will get prolonged. The job losses on Wall Street, meanwhile, will impact not just those who have been turfed out but also fresh hiring. Business and consumer confidence will inevitably suffer.
So far, India's growth picture has been better than might have been hoped for. The drop in oil prices over the last couple of months has provided huge relief, but the question is whether prices are going back up again.
Meanwhile, at 25 per cent in dollar terms (28 per cent in rupee terms), the first quarter's export growth is remarkable. While the index of industrial production shows a sharp deceleration, July was better than the April-June quarter; even in the June quarter, corporate sales showed growth. Against that, however, growth in advance tax payments seems finally to be slowing down, suggesting that reality is catching up with companies as margins get squeezed.
The various official growth forecasts for the year have moved from 8 per cent-plus to 8 per cent-minus, with only the pessimists saying it will fall to as low as 7 per cent -- which the country can live with in a downturn.
The question that begs to be asked is about the year to follow. Meanwhile, with overseas investors pulling out of the stock market, the Reserve Bank will have to pay attention to domestic liquidity issues; the market stabilisation bonds may have to be bought back in order to pump rupees into the system. The problem of course is that inflation is still at over 12 per cent. The watchword has to be caution.
