The Indian economy in 2012: What should the government do?

No easy ride

There is no question that this is a time of economic uncertainty.

The global indicators are disturbing to say the least, as it is evident that the sources of external growth that the Indian economy has been relying upon in the last few years will be less potent, and may even provide negative impulses in the course of the year.

There is already in place self-reinforcing cycle of contraction in the eurozone. As long as European leaders (and incidentally the IMF) continue to press for fiscal austerity, this will continue.

Meanwhile, the peculiar political configurations in the US make it unlikely that any real fiscal stimulus will emerge to ensure a more broad-based and stable economic recovery. Even looser monetary policy of the European Central Bank and the US Federal Reserve will not be sufficient to lift economic activity in this context.

It is foolish to expect that economic expansion in China, Brazil, Russia and some other countries will be enough to compensate for the slowdown in the advanced economies. In sheer quantitative terms, total incomes and import demand in these countries simply cannot counterbalance the falling net demand from US and Europe.

But there are further reasons why developing countries - including those that are currently being expected to save the world economy - cannot expect an easy ride in the coming year themselves.

Image: Euro coins are seen in this photo illustration taken in Rome.

Reuters Images