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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/European Union and India. I'm struck by some similarities. In both places, there is little or no concern that inflation will rebound any time soon. As a result, people based in New Delhi at least are confident 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 same 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 New 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 seem to be bearing the brunt of the blow. The banking picture seems murkier, 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.
Also posted on Simon Johnson’s blog,
Baseline Scenario.
