Globalisation bites back.

One of the reasons why India was being tricked to sign a 4 year ' peace clause ' on agriculture by western countries, while agreeing to a full Trade Facilitation Deal, has now been exposed. The Eurozone economy grew only 0.2% in the second quarter after growing at 0.8% in the first. The biggest economy, Germany contracted by 0.2% from the first quarter, Italy also contracted while France was flat. The European Central Bank had forecast a growth of 1% for 2014 but now it seems that growth will be an anemic 0.5-0.7% this year and maybe 1% next year. What is really worrying economists is the threat of deflation as the inflation rate came in at only 0.4%. Japan contracted by 6.8% in the second quarter because the sales tax was increased from 6 to 8% from 1 April. This is the most graphic illustration of how high taxes reduce growth by cutting consumption, even in the world's third largest economy. Will Indian politicians learn? We doubt it. Volume of consumption fell by 2% in India as inflation is multiplied by VAT and Service taxes, higher than in Japan. The US economy grew 4% in the second quarter but here too manufacturing has not improved. While Europe resorted to austerity and drastically cut spending to reduce deficits the US did the opposite with the Federal Reserve buying bonds worth $85 billion every month to increase liquidity. It is now cutting this down by $10 billion every month and will stop it altogether in a couple of months. With interest rates at zero percent a lot of this money was coming into emerging economies, including India, strengthening our currencies and creating asset price bubbles in stocks and real estate which could fall severely once the stimulus stops. Asset price bubbles are not restricted to developing countries only. There is a possibility of another market crash in western countries. Reserve Bank Governor, Raghuram Rajan is warning of such a crash and is building up foreign exchange reserves to combat a sudden fall of the rupee. Banks are up to their old tricks as politicians cravenly surrendered to their pressure not to increase regulations. Pharma companies in the US are buying foreign companies so as to shift their tax base to a country with lower rates. Maybe other companies will follow suit. Western countries thought that globalisation would allow them to exploit weaker countries. They may yet find that it has bitten them the hardest.