Global economic slowdown: Where does India stands?, India’s US policy in the age of Trump Current Affairs 16th June, 2017

Global economic slowdown: Where does India stands?, India’s US policy in the age of Trump Current Affairs 16th June, 2017

Global economic slowdown: Where does India stands?

The global economy has been recovering from the recession of 2009 at a tepid rate (at approximately 2.5 per cent per annum). India’s economy is in a ‘fairly good shape’ and it is likely to be less affected than other emerging economies if there is a further shock to the global economy, according to a senior official of the IMF.

Main causes of the current slow global growth are:

  • Declining populations- Population growth boosts economic growth through an increase in the workforce, aided by an increase in productivity.

  • Protectionism- it will hurt global trade and cross-border flow of people.

  • No major productivity-enhancing revolution. The fourth industrial revolution is yet to take place.

  • China’s economy is expected to steadily slow down to 6.6% in 2017 and 6.2% in 2018 due to the “complex process of rebalancing” by reorienting demand from exports and investment in consumption.

While for a majority of countries, a high or higher growth rate would be elusive, India has a great opportunity before it.

India seems to be less vulnerable

  • With growing political uncertainty in the US, the emergence of protectionist policies and amidst slowdown concerns related to China, countries whose GDP is dependent on exports could find themselves with increased instability. The most affected are those with exports accounting for a high percentage of their GDP and with low domestic demand support. India appears to be less vulnerable on this front.

  • Despite the US’s importance as a market for India and Japan, the larger and more diverse nature of these economies provides them with some cushioning from protectionist trade policies, with shipments to the US making up only 2 per cent and 3 per cent of their respective GDPs.

  • Furthermore, an ADB report suggests that a growth slowdown of 1.6 percentage points in China would bring about a growth deceleration of 0.26 percentage points in developing Asia as a whole. Meanwhile, India is most insulated from China’s slowdown: Its annual GDP growth could be lower by a slight 0.14 percentage points.

  • With roughly 59 per cent share in India’s GDP, household consumption spending has been the major driver of economic growth and has, on many occasions, acted as a protective shield to global demand shocks.

  • India also has low reliance on external savings to fund its growth. As per S&P Ratings, the banks are mainly deposit-funded and don’t rely on wholesale funding to grow their loan books.

  • Healthy consumption spending in India and an inward domestically demand-oriented economy makes India less vulnerable.

The Indian context:

  • India is in the middle of a demographic dividend which would be an impetus to growth, if the new entrants to the work force are productively employed.

  • The government has recognised the need for jobs and embarked on a multi-pronged strategy including corporate governance reform, pro-growth tax reform, agricultural reform, administration reform, the expansion of public-private partnerships etc.

  • Increasing jobs through targeted manufacturing/service investment — tourism, health, education, micro and small enterprises, agribusiness —

  • Massive drives like Make in India, Skill India, productivity-based infrastructure development and initiatives related to the ease of doing business will surely help.

  • The rationalisation of subsidies and direct cash transfers will plug leakages associated with the previous subsidy regime and make money available for merit subsidies — health, education, etc. — that can help us exploit our population dividend.

These strategies have begun to make a difference and should, over a reasonable period of time, create the jobs we need. We are now poised to leapfrog directly into the digital world and reap the productivity gains.

Challenges:
The global financial crisis largely passed India by; so, our need for quantitative easing was limited. But we have created our own crisis — non-performing assets (NPA). However, the government is working to resolve the issue. It is worth mentioning that the banking system has a provisioning coverage of 50 per cent plus on NPAs.

The priorities should be:

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