In general, slowdown in developed world has differing effects for developing countries. First, exports, foreign investments (direct and portfolio) and ODA flows suffer, as do poverty-reducing effects of growth. Second, government revenue, driven almost entirely by taxes, is adversely affected, limiting fiscal space available to governments. Tax revenue in developing countries is more concentrated, and more sensitive to lower growth, than developed countries.

Third, there are differential spatial effects, since those who are more integrated and connected with global and national markets suffer more.  After the East Asian crisis, there was some interesting work there.  Rural poor in Indonesia suffered less than urban poor, but rural poor in Thailand suffered more than rural poor in Indonesia, because rural poor in Thailand were more integrated with urban markets.  Fourth, poor are more vulnerable to shocks in the sense that if shocks cross a threshold, there are long-lasting effects on poverty, even after the economy recovers, since debt increases, productive assets like livestock and land are sold and children are taken out of school.  Nutrition levels also suffer.  Assuming recovery in Q3 of 2009-10, how bad will the next financial year be?  We don’t quite have a figure from government. The PM’s Economic Advisory Council hasn’t stuck its neck out, implicitly suggesting 7 per cent should be possible.  The PM’s and the former FM’s 7 to 7.5 per cent are from a time when government still pushed the decoupling hypothesis. The RBI governor has said next year will be worse than this one. In what seems to be informal prognosis, Chief Economic Adviser still roots for 8.5 per cent.

... contd.