S. S. Bhandare*

The appalling terrorist attacks on the Untied States of America on September11  have sent shock waves across the world. It was a least-cost aggression, but it left the deadliest and the costliest scar on America and the rest of the world.

Various ramifications of this epoch-making, horrific event are still being assessed. Its devastating impact is not just physical and financial, but psychological and traumatic. Neither the US nor the world is going to be the same again. There is a paradigm shift. Increasingly, the globalising world has to encounter the growing vulnerability, and there is no escape from the reverberations the terror attacks have caused.

Will this trigger another world war? How virulent and how prolonged will be the retribution and reprisal from the US, irrefutably the strongest nation on the earth? Will the rest of the world be drawn into this conflict? What is going to be the economic, financial and geopolitical fallout of this event, and of the emerging scenario? Will the global economy drift towards recession along with the downturn of the US economy? Will the US become restrictive and cause in its wake the return of protectionist stance in the global economy? What are the likely consequences of these events on India? The attacks have thrown up numerous such questions, but answers at this stage are tentative and sketchy.

Proximate adverse global impact
Needless to say, the extent of the impact on the economy would depend on whether the attacks were a one-time event or whether it was a start of a new period of heightened uncertainty. Our assessment confines itself only to short-term economic implications for India. Obviously, this cannot be seen in isolation to what happens to the rest of the world. That the US and the global economy are both on the decelerating growth trajectory is by now a well-known fact. The World Economic Outlook, released by the IMF in May 2001, projected a growth-drop for the world economy from 4.8 per cent in 2000 to 3.2 per cent in 2001, with a sharp slowdown for the US from 5 per cent to 1.5 per cent. These projections have since been revised downwards by at least 0.5 to 0.7-per cent points.

The US economy is surely going to face the brunt; it will be hit by the severity of disruptions and dislocations in trade, travel, tourism, civil aviation, and in a host of financial services, especially the insurance sector. Apart from the loss of incomes, there is going to be the ‘negative’ real-wealth effect due to the erosion in the stock market valuations. If the rapidly falling consumer confidence index, the setback to retail trade and the creeping increase in the unemployment rate are any indications, the US economy seems already in the midst of a recession. All these would impact its prevailing fragile growth prospects.

The $10-trillion US economy represents over 22 per cent of the global economy and accounts for 14.2 per cent of the world’s exports of goods and services. It has been the largest importer from global markets, providing support of over $1258 billion or 18.9 per cent of total world imports in 2000.

During the 1990s, the US recorded an annual import growth of as much as 9 per cent, while the average for the world was about 6 per cent. Thus, it served as a powerful engine of the world economic growth through its massive imports. Besides, the US economy has been attracting a predominant share of the world’s capital inflows and has itself been the significant driver of foreign direct investment. The setback to such formidable economic might is bound to transmit an uncertain outlook for the rest of the world, and India cannot be an exception. (See Powerpoint presentation).

Implications for India
How will the impending global recession affect India? For the past two or three years, India has already been a victim of a three-pronged crisis of underperformance, credibility and confidence. Our real GDP growth is progressively declining. Considerable hopes are now being pinned on the normalcy of the current monsoon to bail the economy out of the woods. But a fresh bout of external shock threatens to neutralise the gains of strong agricultural recovery.

In the short term, up to the current financial year, the Indian economy would suffer the demand contraction impact due to the loss or reduction of:

• remittance income
  
• exports of goods and computer software
  
• ‘real’ wealth-effect due to the erosion of market capitalisation of equity investment
  
• capital spending of the government
  
• disposable income in the event of additional tax efforts to overcome the prevailing fiscal strains.

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* The author is a consultant with the department of economics and statistics, Tata Services