Who will manage global risk in 2008?
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The debate on coupling versus de-coupling rages endlessly. The de-coupling argument about the global economy suggests that notwithstanding a US recession or slowdown (and therefore consumption slack), it can be compensated by the high growth of Asian countries like India, China, Malaysia, Indonesia and their rising consumption.
However, US consumption of over $ 9.6 trillion, or 19 per cent of world GDP, compared to the $ 2.5 trillion of all these countries limits the extent to which Asia can compensate for the US slack. No doubt in the medium term, high growth in these countries with a much younger population has positive multipliers. But it will be quite a while before global prosperity can be decoupled with the state of the US economy.
When it comes to India, we have no doubt become much more inter-dependent, and trade as a percentage of GDP is 35.9 per cent, while exports as a percentage of GDP is now around 15 per cent. Within this number, export to the US is only 2.12 per cent of GDP. It is suggested that notwithstanding a US slowdown, rising consumption and investment in India can sustain economic buoyancy and there is a long way to go before our needs are saturated. However, the US slowdown will also affect Europe and other countries in Asia and we would be affected not merely by slowdown of exports to the US but other destinations due to wider contagion effects. Its severity could be less than many other countries.
In a broader context, the medium-term risk for global growth was the subject of animated discussions in Davos. The question of what constituted the single biggest risk evoked a mixed response, which included:
Recession in the US