The unusual combination of spiralling prices due to commodity driven inflation on one side and the credit crunch on the other has left many Govts worldwide in a unique situation these days. As the talk of slowdown becomes frequent, I'm tempted to look at series of policy mesures taken to avoid recession by the then Govts facing Asian crisis and the dotcom bust in late ninetees and compare with the present situation. Unfortunately the comparison ends there itself. The Principal reason being- both these crises in ninetees affected GDP growth and the inflation in much the same way. Central Banks could then resort to cutting the interest rates to bolster spending without bothering too much about the inflationary trends, not any more. Many developing as well as developed economies are reeling under double-digit inflation so the option of cutting the interest rate is no longer feasible. On the other hand, high interest rates are taking toll on industrial investment plans.. What are the options before policy makers?
My thinking is- from the time this crisis erupted last year, western economies have managed to stay away from deep recession on account of sustained export growth into emerging economies...obviously their policy stimulus would be/should be to sustain and improve this. For developing countries like India and China, the policy stimulus essentially has to be around sustaining the domestic consumtion boom led by domestic manufacturers/service providers
On the fiscal stimuli front, an important and a bold policy measure to consider would be to pronounce lower tax rate outlook for next 3-5 years period. This would go long way in instillng the confidence in the investors who generally in times like this, based on the perception of tougher fiscal policy ahead, are bent upon improving cash flows in longer term....
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