Tariffs to LPG, crisis spillover sharpens policy challenge

The 1997 Asian Contagion, triggered by the collapse of the Thai baht before spreading to other countries in the region and beyond, was a financial crisis. So was the American subprime mortgage crisis leading to the global Great Recession from late 2007 to mid-2009. India’s twin-deficit and twin-balance-sheet problems of the last decade were also primarily “financial” crises. Financial imbalances — from currency devaluations and capital flight, the bursting of housing and asset bubbles or high fiscal and external current account deficits — spilled over into the real economy, causing growth and investment slowdowns. The “real” impact of over-leveraged private corporates not investing and bad loans-saddled banks not lending on the Indian economy was felt through much of the 2010s.

The present decade, in contrast, has seen more “real” crises. The Covid pandemic, Russia’s invasion of Ukraine and the ongoing US-Israel-versus-Iran conflict have all originated from the physical, as opposed to the financial, world. These have profoundly disrupted physical human interaction or movement of goods. Just as the virus made people afraid of meeting one another, the wars have created anxiety among exporters and importers, and producers and consumers alike. The movement of vessels through the Strait of Hormuz, which handles about a fifth of the world’s total petroleum liquid consumption and liquefied natural gas trade, has stopped due to non-availability of war risk insurance for hull and cargo. The very reports of attacks on ships and their sailors being stranded at sea are enough to freeze international trade. The ripple effects on other real economic activities don’t take long in coming.

Like with Covid and the Russia-Ukraine war, which sent global oil and food prices skyrocketing, the current West Asia conflict will have a spillover from the “real” to the “financial”. For India, it could entail a further weakening of the rupee and renewed pressures on both the balance of payments and government finances. This, just when the Centre as well as states have been working on fiscal consolidation and reduction of debt-GDP ratios that had spiked to all-time-highs in 2020-21, because of pandemic-time spending and economic contraction. Financial crises resulting from debt-fuelled growth, over-investment and speculative bubbles are normal — even considered part of the business cycle — in most market economies. The “real” crises of the kind seen in this decade, including those emanating fromDonald Trump’s tariff wars, have more to do with geopolitics. It makes economic policymaking much more complicated.