Russia in recession


30/4/2014

One of the Bricks countries, namely Russia has entered into technical recession (negative growth in two quarters in a row). Russian economy contracted by about 0.5 percent from Jan-March 2014 compared with the previous quarter of October – December 2013. Their finance ministry has just announced that the second quarter will continue to have a negative growth.

One of the important reasons attributed is the flight of capital. IMF expects that this year alone nearly 100 bln dollar worth of investment would have left the country. Russians involvement in Ukarine is also cited as one of possible reasons. The lesson to learn for India is the following: We depend heavily on foreign capital. 45 percent of all investment in the Indian stock market is by the foreign institutional investors. If political uncertainty continued after the current election, you can see them running for shelter. We have borrowed 225 billion dollars through the external commercial borrowing. This is ever increasing. Part of the reason is that there is not adequate savings available internally. This borrowing has to be repaid in dollars eventually. As and when our exports slowdown, this will create a panic in the financial market.

Finally political uncertainty can create a risky investment climate. The great days of Bricks and their splendid growth are over. Slowdown in Europe and the just announced 0.1 percent growth in Q1 in the US do not create any hope of major growth trends in the developed world.

The new Indian government, please wake up and get familiarized with reality. Even a 5 percent annual growth will become pleasantly welcome. Government should stop acting as welfare state and instead commit all its resources to economic growth. If we don’t, we will sink lower and lower and will revert back to below 4 percent growth which existed a decade ago.

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