India’s fiscal position deteriorates

• India’s fiscal deficit reached almost 71 percent of its full-year target in the first half of the year, casting doubts over its ability to meet budget goals as federal finances feel the pressure of squeezed revenues and slowing growth.
• Price pressures remain elevated and growth momentum took another beating as annual infrastructure output growth slowed to a near three-year low of 2.3 percent in September, other data showed, further complicating the task for monetary policymakers
• “In all likelihood, there will be a slippage on the fiscal deficit front, which could be of significant size”, said Siddhartha Sanyal, Economist at Barclays Capital in Mumbai.
• India’s fiscal deficit from April to September was 2.92 trillion rupees ($60.1 billion), government data showed on Monday, 71 percent of the 4.13 trillion rupees target for the current fiscal year, a serious threat to the government’s deficit projection.
• The government has budgeted a fiscal deficit of 4.6 percent of gross domestic product (GDP) for the fiscal year 2011/12, but many private economists see the deficit for the year overshooting the 5 percent mark.
• Separately, the consumer price index (CPI), a barometer of price pressures at the retail level, surged an annual 10.06 percent in September compared with an 8.99 percent annual rise in the previous month.
• Weak markets have hampered government share sales targeted at 400 billion rupees ($8.2 billion), with only about $235 million mopped up so far.
• The government has already overshot its borrowing target for the fiscal year 2011/12 by more than 530 billion rupees. With slowing economic activity taking a toll on the government’s tax revenue collections, investors are bracing for further additional borrowings before the end of this fiscal year.
• India’s domestic-demand driven economy grew only 7.7 percent in the April-June quarter, its slowest pace in six quarters and is expected to record its worst annual economic growth since the global financial downturn.
• The RBI last week cut the growth projection for 2011/12 to 7.6 percent from 8 percent.
• “Clearly there are headwinds to the investment cycle, which the infrastructure output data is showing, while the CPI data reflects the pressure on food prices,” Sanyal said.
• Net tax receipts were at 2.43 trillion rupees and total expenditure was at almost 6 trillion rupees but revenue receipts for the April-September period were just 37 percent of the budgeted level, reflecting the weak federal finances.
• A contraction in sectors such as natural gas, cement and coal reflect weakening economic activity. Coal production declined nearly 18 percent in September, while that of natural gas and fertilisers shrunk by more than 6 percent and 2 percent respectively.
• A slowing economy but high inflation is posing a policy dilemma for the policymakers.
• The Reserve Bank of India (RBI) has raised interest rates 13 times since March 2010 in its battle against persistently high inflation that topped 9 percent for nearly a year.
• But in an acknowledgement of mounting risks to economic growth, it has signalled a pause in its tightening cycle.
• Any slippage on the fiscal gap target has the potential of worsening India’s inflationary woes and choking private investment.
• RBI’s chief last week warned of inflationary risks if the government’s deficit for the current fiscal year ending in March exceeds the budget target.
• New Delhi has admitted meeting the fiscal gap target would be a “great challenge”, but officials say they are trying to keep the deficit under 5 percent of GDP by pruning expenditure.

RBI hiked repo rate today by 25 basis points to 8.5 percent

• The Reserve Bank of India raised interest rates on Tuesday for the 13th time since early 2010 but said it was likely to hold off on further increases as it expects high inflation to ease beginning in December.
• The RBI raised its policy lending rate, the repo rate, by 25 basis points to 8.5 percent.
• It also revised down its growth forecast for the fiscal year ending in March to 7.6 percent from 8 percent with a downside bias earlier, while sticking with its forecast that headline wholesale price index inflation will ease to 7 percent at the end of the fiscal year.
• The likelihood of a rate move at its December review is “relatively low,” the RBI said in a statement.
• “Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted,” it said.
• The RBI under Governor Duvvuri Subbarao has been one of the most aggressive central banks anywhere and has continued to take its fight to inflation even as its global counterparts have refocused monetary policy towards promoting growth.
• Despite continued policy tightening, inflation in India remains sticky, with the headline wholesale price index up 9.72 percent annually through September, its 10th straight month above 9 percent and highest among the BRIC grouping of economies that includes Brazil, Russia and China.
• Meanwhile, India’s economy grew at 7.7 percent in the June quarter, its weakest in six quarters, while industrial output growth was below 5 percent in July and August.,
• Economists had expected the central bank to raise rates on Tuesday but 13 had expected it to pause, with most respondents expecting rates to remain unchanged after Tuesday for the remainder of the fiscal year through March.

Global turmoil impacts rupee

• The rupee plunged breaching the psychological barrier of 50 a dollar amidst a mood of negativity in the economy. The uncertainties in the global economy are stronger today than in 2009 when the rupee moved to similar low levels against major currencies.
• The rupee closed at 50.02 a dollar last Friday after touching a 30-month low of 50.32 intra-day (lowest since April 28, 2009). Meanwhile, the Reserve Bank of India fixed the reference rate for the dollar at 50.0670.
• More than a month, domestic foreign exchange markets were testing low levels the rupee could reach against the dollar. Markets expected the central bank to intervene to check the fall of the rupee. But instead of doing so, it allowed the rupee to decline gradually ensuring no volatility affecting the market. The RBI Deputy Governor Subir Gokarn had reportedly said in early September that the central bank would intervene in the foreign exchange market if the falling exchange rate of the rupee disrupts real sector.
• In the current month, the rupee has weakened by more than 2 per cent. For the quarter ended September, the rupee’s value diminished by 8.8 per cent. Further, the rupee was worst performer among its major Asian peers in 2011.
• Last Thursday, spot rupee opened at 49.42 and traded at a low of 49.81 and a high of 49.3650 before closing at 49.8050. In the futures trading too, the rupee moved down sharply on Friday against the dollar from Thursday’s level. On Thursday, the dollar-rupee October month contracts opened at 49.4825 and recorded a low of 49.8950 and a high of 49.44 before closing at 49.88. On Friday it opened at 50.1050 and moved to a high of 50.3850 and a low of 50.0300 before closing at 50.0825. However, in the November contracts, it opened at 50.37 and touched a low of 50.28 and a high of 50.61. It closed at 50.3750 for the week. Markets expect further fall in the exchange value of the rupee against U.S. dollar.
• There were several reasons for the fall in value of rupee against the dollar. First, there is a strong demand for dollar as no one is able to predict an end to the European debt crisis.
• The crisis, which started from Greece, is now spreading to other European countries. Meanwhile, the two largest economies of European Union, Germany and France, caught into a tussle on how to resolve the problem.
• While France suggested the use of more European central bank money to fight the eurozone debt crisis, Germany and other EU partners resisted this move. This uncertainty leads to higher demand for dollar in the foreign exchange market. For India, falling rupee means importing inflation, which is hovering at higher levels, more than the central bank’s tolerable expectation. India’s highest import is oil which is around 80 per cent of the total demand for oil. Oil import bill stood at $79.55 billion in 2009-10 and increased to $106 billion in 2010-11.
• As per an earlier estimate, the oil import bill is estimated between $120 billion and $130 billion in the current fiscal year.
• Further, oil accounts for almost one-third of the total imports. At present, Brent crude oil prices are moving between $109 and $110 a barrel. So the huge demand or ever-increasing demand for oil will definitely compound the inflationary pressure.
• Other than persisting inflation, the increasing Current Account Deficit is another concern. India’s current account deficit (CAD) widened in the April to June quarter largely due to a rise in trade deficit. CAD stood at $14.1 billion in the first quarter of current financial year compared to $12 billion in the corresponding quarter of the previous year. It was at $5.4 billion in the January to March quarter of 2011.
• Goods exports recorded a 47.1 per cent growth while imports registered a growth of 33.2 per cent during the first quarter of the current fiscal. The trade deficit on Balance of Payments (BoP) basis, in absolute terms, amounted to $35.4 billion, which was higher than $32.3 billion in the corresponding quarter of 2010-11.
• Net exports of services grew by 19.1 per cent during the first quarter of 2011-12 as compared to the first quarter of 2010-11. According to the RBI, however, there was a net accretion to foreign exchange reserves of $5.4 billion in the first quarter of 2011-12 (excluding valuation).
• The U.S. and European Union are the biggest importers of Indian goods. Exports were growing but the European crisis will have a negative impact on Indian exports.
• “If oil and commodity prices remain elevated, the CAD will remain significant,” said RBI in its annual policy statement for 2011-12. It also admitted that financing of CAD was going to be a challenge as advanced countries begin exiting from their accommodative monetary policy stance. This could slow down capital inflows to emerging market economies (EMEs), including India, as investors rebalance their portfolios. The RBI has always maintained that it will not target any specific exchange rate for the rupee.
• Further, the central bank said that it would not use the foreign exchange rate for its inflation management. It will only intervene to prevent excessive volatility.

today world stocks, oil rise on EU hope, China data

• Global stocks hit a seven-week high on Monday and oil prices rose on optimism European leaders were moving closer to resolving the debt crisis and after Chinese data eased fears of an abrupt slowdown in the world’s second-largest economy.
• The euro, however, slipped from a six-week high against the dollar, reversing early gains as investors remained worried about sharp differences over the size of haircuts private holders of Greek bonds will have to accept.
• European Union leaders neared agreement over the weekend on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion. But final decisions were deferred until a second summit on Wednesday.
• European Union leaders neared agreement over the weekend on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion. But final decisions were deferred until a second summit on Wednesday.
• “There is still a lot of hope that a solution out of Europe this time will last, and that is sending the market higher to break above trading ranges,” said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.
• MSCI’s all-country world stock index last rose 1.1 percent, after hitting its highest level since early September. Emerging market shares rallied 2.8 percent.
• European shares rose 0.5 percent. Earlier, Japan’s Nikkei added 1.9 percent.
• U.S. stocks gained in early trading after heavy equipment maker Caterpillar Inc reported a quarterly profit that topped estimates on record revenues.
• The Dow Jones industrial average was up 44.73 points, or 0.38 percent, at 11,853.52. The Standard & Poor’s 500 Index was up 6.73 points, or 0.54 percent, at 1,244.98. The Nasdaq Composite Index was up 23.57 points, or 0.89 percent, at 2,661.03.
• BRENT above $110.
• Brent crude oil rose above $110 a barrel after solid Chinese manufacturing data boosted optimism about fuel consumption.
• Brent crude was last up 74 cents at $110.30 a barrel, down from an intraday high at $110.94 a barrel. U.S. crude rose $1.24 to $88.64 a barrel, after reaching an intraday high of $88.90 a barrel.
• The euro last traded 0.4 percent lower at $1.3846 in volatile trade.
• The dollar fell against the yen, trading close to a record low hit on Friday and leaving traders on alert for possible renewed currency intervention to stem strength in the Japanese currency.
• Finance Minister Jun Azumi said on Monday that Japan will take decisive action on excessive and speculative forex moves. He said that the dollar below 76 yen did not reflect economic fundamentals.
• German government bond prices rose, with investors unconvinced plans on the table at a midweek European summit would be powerful enough to tackle the euro zone debt crisis.
• “All eyes are looking at Wednesday’s possible answers. We are still not sure how the EFSF would work. This leaves a wide range of options open,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
• Longer-dated U.S. Treasuries prices also rose. The 30-year bond rose 14/32 to yield 3.24 percent, down 2 basis points from late Friday.

business in india

• With the Western way of doing things under siege, India’s rise offers a dollop of reassurance to anyone who believes in the combination of democracy and capitalism. It is a superpower-in-waiting whose people vote, whose society is raucous, and whose firms are red-blooded and striding onto the world stage. The contrast with China’s authoritarian capitalism is one that fans of laissez-faire find comforting. Some see an echo of America’s freewheeling approach, with spicier food and worse roads. But that view is a delusion. For while India’s capitalism does have oodles of vim, it is writing its own rules, some better than others.
• Some Indian firms have, admittedly, followed an American-style fairy tale. Infosys, a technology firm, leapt in a generation from a start-up to a global blue chip, owned by institutional shareholders and measured against that most Western of yardsticks, the stock price. Yet this is the exception, not the norm. A Martian investor landing on Mumbai’s streets of gold might judge its business scene a mix of São Paulo, Seoul and Shanghai, with only a dash of Silicon Valley.
• In Western economies well over half of stockmarket profits are from firms controlled by institutional investors; in India only an eighth are. Instead capitalism is skewed towards the state and business houses (conglomerates usually controlled by families and family trusts). Government—grumpy, doddery and sometimes bent—still looms large. State-backed firms, similar to China’s, make 40% of stockmarket profits and dominate energy and finance. A vast number of other public-sector entities, some of them decrepit, often create bottlenecks. These are the remnants of India’s Fabian nightmare.
• India Inc’s newer companies rose after a burst of liberalisation back in 1991. In its wake foreign firms piled into industries such as consumer goods and carmaking, drawn by a big pool of labour and customers. Between 1995 and 2003 superb new local entrepreneurs made fortunes in the sunrise industries of telecoms, air travel, technology and health care.
• The revolution also hit the traditional business houses. Many flabby outfits declined. Yet plenty fought back, becoming much more professional outfits. Thus alongside stars born in the 1990s, such as Bharti Airtel, a mobile-phone firm, older conglomerates such as Reliance Industries, Aditya Birla and Tata Sons still loom large in the Indian mind, their extraordinarily diverse output driven, eaten, worn and watched, their hereditary bosses as famous as film stars. Though mid-sized by global standards, they have entered the consciousness of foreigners too, with takeovers abroad, from Novelis, an aluminium outfit, to Corus, a steel company. The next rank down of business houses, such as Mahindra, are now going global too. India is exporting a corporate form which owes as much to South Korea’s chaebol, Japan’s keiretsu and Brazil’s barons as it does to a current American or European ideal of the firm.
• Perhaps India is just at an earlier chapter of the Western script. In 1900 American industry was dominated by tycoons such as John Pierpont Morgan and John D. Rockefeller. Now, thanks to the need to raise capital from outsiders, antitrust probes and the absence or flaws of heirs, the remnants of their empires are dismembered and answerable to fund managers—as Microsoft and Apple already are.
• Still, by that yardstick Indian firms have decades before institutional capitalism takes over. And their approach of being widely spread and tightly owned has lots of puff left. After the ructions of the 1990s the share of activity from family-linked firms has been stable for a decade. The few firms controlled by diffuse owners often bin their MBA textbooks and run as conglomerates too. First-generation entrepreneurs who made it in the 1995-2003 sunrise era are diversifying their groups and teaching the kids to take over. And although the biggest group, Tata, will move beyond its family when its heirless fifth-generation patriarch retires in 2012, it is in no hurry to break itself up.
• This suggests there is in fact a logic to India’s favourite way of organising firms. It makes sense for businesses to sprawl because the Indian state is still pathetically weak. Infrastructure is so awful that companies often build their own. Courts are slow and sometimes corrupt, so contracts are hard to enforce and banks and businesspeople are inclined to stick with companies they know and trust. Established business houses can use their muscle to expand into new areas, sometimes at the expense of newcomers. Fewer new firms have broken into the big league since 2003 and those that have done so have tended to be good at working the political machine.
• All this might seem a recipe for disaster. In Korea and Japan closely held and widely spread firms became slothful. So far India Inc has been different: its big business houses compete and innovate fiercely. Their returns on capital are neither pathetic nor outrageous and most are prepared to invest billions of dollars in the risky capital projects that India needs so badly.
• The danger is that over time, without another bout of reform, sclerosis will set in. India’s firms mostly thrive in spite of the weak state; they need to make sure they do not thrive because of it. Already there are two worrying signs: the slowdown in new entrepreneurs breaking into the established order; and endemic corruption. Both clash with the aspirations of the masses, who want India to be a land of opportunity. The current popular fury against graft is aimed at politicians, but India’s oligarchs have often been on the other side of the deal and may be next in line to get a roasting.
• Few dispute the uselessness of much of the state and the need for an Indian Deng Xiaoping or Margaret Thatcher to roll it back. Whether that reformer arrives soon to deliver better infrastructure, swifter justice and good governance is less clear. But businesses can still do their bit by cleaning up their act, loudly supporting reform and improving their own governance, which is often murky. India Inc has a huge amount to be proud of. Now it needs to venture into the unknown.

Coordinated measures needed to control price rise

• Inflation again continues at higher levels and nobody is ready to believe that it can come down in the near future. One of the Deputy Governors of the Reserve Bank of India (RBI) has already hinted that money tightening policy will continue.
• While the RBI is planning to announce its second-half monetary views and measures on October 25, it would be interesting to know that fiscal measures still continue to influence the monetary policy of the central bank and only a coordinated approach by the government and the RBI could bring down inflation.
• A Working Paper published by the RBI titled “An empirical analysis of monetary and fiscal policy interaction in India” by Janak Raj, J. K. Khundrakpam and Dipika Das, tries to throw some light on the subject.In a cross-country context, there has been a renewed interest in analysing the interaction between fiscal and monetary policies in recent years.
• Several factors have contributed to this trend. These include: increasing independence of central bank in the conduct of monetary policy; stability and growth pact (SGP) and formation of European Monetary Union (EMU) under which individual countries pursue independent fiscal policies, but have a common monetary policy; and the demonstrated need for a coordinated response of monetary and fiscal policies during the recent global crisis.
• This study analyses the behaviour of monetary and fiscal policies interaction in India using quarterly data for second quarter of 2000 to first quarter of 2010. It finds that, even after the elimination of automatic monetisation of fiscal deficit in 1997 and prohibiting RBI from buying government securities in the primary market under the Fiscal Responsibility and Budget Management (FRBM) Act from April 2006, “fiscal policy continues to substantially influence the conduct of monetary policy.” Specifically, the reaction of the two policies to shocks in inflation and output is mostly in the opposite direction. While monetary policy reacts in a counter-cyclical manner, fiscal policy reaction is primarily pro-cyclical in nature
• The authors suggest that expansionary fiscal policy is effective in raising the level of output over the potential level only in the short run.  In the medium- to longer term, however, fiscal expansion leads to economic slowdown. It seems fiscal deficit leads to decline in savings and investment in the economy over the medium-term, besides crowding-out more efficient private sector investment by government consumption. “The positive impact of expansionary fiscal policy on output is highly short-lived, while there is a significant negative impact in the medium- to long-term”.
• Incidentally, the government’s bond auction devolved last Friday on fiscal concerns. The market expects a further increase in the borrowing plan of the government. It also anticipates a policy rate hike in another few days.
• This uncertainty leads to nervousness in the market, where market participants bid for higher yields. They also believe that yields will move up as the government resorts to more weekly borrowings in the second-half of the financial year, which is traditionally considered as a ‘busy season’ for businesses. As the market bid for a higher yield last week, the benchmark 10-year Government Securities (G-Sec) surged up. The RBI set the cut-off yields at 8.78 per cent for the 10-year G-Sec and 8.79 per cent for 7-year G-Sec. Since the announcement of the government’s plan to borrow more at Rs.2.20-lakh crore in the second-half of the current financial year against Rs.1.67-lakh crore planned earlier, on September 29, the yield of the 10-year G-Sec moved up by 34 points, which ended at 8.78 per cent last Friday. This is not a pleasant situation for the RBI.
• In India, several changes have taken place in the monetary and fiscal policy frameworks, particularly since the beginning of the 1990s. These include complete phasing out of automatic monetisation of fiscal deficit through creation of ad hoc treasury bills (also called ad hocs) in 1997 and prohibiting RBI from buying government securities in the primary market from April 2006 under the FRBM Act, 2003. Further, the operating procedure of monetary policy underwent a paradigm shift in the early 2000 with the introduction of liquidity adjustment facility and the interest rate channel becoming the main monetary policy signalling instrument.
• These changes are quite significant and have altered the basic nature of the interaction between monetary and fiscal policies. However, the Central Government continues to incur large fiscal deficits, which has implications for the demand management by the RBI.

Is India becoming an export powerhouse?

• It is common to posit that India’s economy is more self-contained than China’s. Lately the facts have got in the way. In dollar terms China still sells five times more than India, but relative to output, exports of goods and services from India have been chugging up while those from China have fallen. Measured this way the two countries are converging.
• This runs so counter to gut instinct— India is meant to be hopeless at making things—that many mutter about unreliable data. Some reckon firms are over-invoicing for exports to ship black money back into the country. But Sajjid Chinoy of JPMorgan Chase has tallied the official figures against India’s trade partners’ numbers and data on port traffic. He says the conspiracy theories are flimsy.
• Two shifts are happening. First, India no longer only sells simple things such as jewels. A decade ago engineering and petrochemicals were 14% of goods exports; now they are 42%, says Rohini Malkani of Citigroup. Second, the share of goods exported to slothful America and Europe has dropped from a half to a third. India is selling more complex products to a wider and perkier group of trade partners. Small firms are doing a lot of the work, says T.C.A. Ranganathan of Export-Import Bank of India.
• Could India become a “surplus” country like China? The government hopes so, having set as one of its targets—a typical mix of technocratic forecast and armchair bombast—that goods exports will hit $500 billion in three years’ time, double last year’s level. Despite the recent drop in the rupee, most economists are less brave: goods-export growth rates are expected to slow from some 50% in the past two quarters to 20% for the full year, thanks in part to a global slowdown. As for services, which are a third of the overall export basket, they are dominated by software, sold mainly to America  and Europe may wilt.
• The result is a modest but stubborn current-account deficit. Relying on capital flows to fund that is not always comfortable. But no one in India wants to fall into China’s trap of giant surpluses that are recycled as loans to weak Western governments.

The world economy : Slipping and grasping

• In dark days, people naturally seek glimmers of hope. So it was that financial markets, long battered by the ever-worsening euro crisis, rallied early this week amid speculation that Europe’s leaders had been bullied by the rest of the world into at last putting together a “big plan” to save the single currency. Investors ventured out from safe-haven bonds into riskier assets. Stock prices jumped: those of embattled French banks soared by almost 20% in just two days.
• But those hopes are likely to fade, for three reasons. First, for all the breathless headlines from the IMF/World Bank meetings in Washington, DC, Europe’s leaders are a long way from a deal on how to save the euro. The best that can be said is that they now have a plan to have a plan, probably by early November. Second, even if a catastrophe in Europe is avoided, the prospects for the world economy are darkening, as the rich world’s fiscal austerity intensifies and slowing emerging economies provide less of a cushion for global growth. Third, America’s politicians are, once again, threatening to wreck the recovery with irresponsible fiscal brinkmanship. Together, these developments point to a perilous period ahead.
• Most of the blame for this should be heaped on the leaders of the euro zone, still the biggest immediate danger. The doom-laden lectures from the Americans and others in Washington last week did achieve something: Europe’s policymakers now recognise that more must be done. They are, at last, focusing on the right priorities: building a firewall around illiquid but solvent countries like Italy; bolstering Europe’s banks; and dealing far more decisively with Greece. The idea is to have a plan in place by the Cannes summit of the G20 in early November.
• That, however, is a long time to wait—and the Europeans still disagree vehemently about how to do any of this. Germany, for instance, thinks the main problem is fiscal profligacy and so is reluctant to boost Europe’s rescue fund; yet a far bigger fund is needed if a rescue is to be credible. The most urgent solutions, such as restructuring Greece’s debt or building a protective barrier around Italy, require the most political courage—something that Angela Merkel, Nicolas Sarkozy et al have yet to exhibit. The chances of a bold enough plan will shrink if markets stabilise. The less scared they are, the more likely Europe’s spineless policymakers are to jump yet again for a plan that does just enough to stave off catastrophe temporarily, but lets the underlying problem get worse.
• Much of the world is now paying for their timidity: witness the increasingly dark economic backdrop. A slew of recent indicators suggests the euro area is slipping into recession, as Germany’s exports slow, the fiscal screws tighten, confidence slumps and the banks’ travails imply tighter credit. Even if the euro-zone crisis were to be solved tomorrow, the region’s GDP would probably shrink over the coming months.
• America’s economy is still limping along, though the summer slump in share prices and consumer confidence suggest future spending will weaken further. The Federal Reserve is trying new ways of support, somewhat half-heartedly. Whatever it does, America is currently on course for the most stringent fiscal tightening of any big economy in 2012, as temporary tax cuts and unemployment insurance expire at the end of this year. That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November. If Democrats and Republicans fail to hash out a compromise on the deficit, draconian spending cuts will follow in 2013. For all the tirades against the Europeans, America’s economy risks being pushed into recession by its own fiscal policy—and by the fact that both parties are more interested in positioning themselves for the 2012 elections than in reaching the compromises needed to steer away from that hazardous course.
• What about the cushion the emerging markets provide? That, too, is getting thinner. Their growth is slowing (as it needed to, since many economies were overheating). Recent falls in emerging-world currencies and stock prices show that financial panic can afflict the periphery too. Some emerging economies, including China, have less room to repeat their 2008-09 stimulus because of the debts that splurge left behind. Monetary policy can be loosened: several central banks have cut rates. But, overall, the emerging world will be less of a buoy to global growth than it has been hitherto.
• Some of these constraints are unavoidable. Many governments have less room to support weak economies than they did in 2008. Some caution, too, is understandable from central bankers who have waded ever deeper into unconventional monetary policy. But governments are not just failing to act: they are exacerbating the mess.
• In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.
• The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.