LIVE Online ClassWhat can India do to overcome the global slowdown? GS: 3 :EMPOWER IAS
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By: Empower IAS
What can India do to overcome the global slowdown?
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Q) What reforms can India pursue at this stage to align its manufacturing and trading activity with global demand patterns and protect itself from the world’s growth pangs?
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In news:
- The IMF expects global economic growth to be just 3% this year, the lowest since the 2008 global financial crisis.
Important facts:
- Unlike in 2008, when India was insulated from a global economic meltdown, the economy now is on the ebb, with growth in the first quarter of 2019-20 hitting a six-year low of 5% and growth projections being slashed by agencies for the rest of FY20.
What has changed in the global economy in the last couple of years which has turned the headwinds India’s way?
- The latest IMF World Economic Outlook says there is a synchronised global economic slowdown. The trigger was probably the trade slowdown.
- Recently, the WTO also indicated that world trade growth would be 1.2% , down from 3%.
- A very anaemic or even a flat growth rate in trade is pulling down the economy. And because this is the age of global integration, all economies get affected.
- The trigger also lies in the protectionist tendencies of world economies and the U.S.-China trade war.
- India is also affected by this and other domestic issues.
- The global slowdown seems to have started in early 2018 largely because of the premature withdrawal of the stimulus that the global economy was introduced to in the post-2008 crisis.
- Emerging market economies started showing some weaknesses. Brazil and South Africa have already got into the recessionary stage.
- A big country like China started slowing down although there are many who say it is deliberate to reduce the overheating the economy was facing. U.S. and China trade policies have worsened the global situation.
- The most unfortunate consequence of this for India is that compared to 2008, we are not immune to global slowdown. In fact, in 2008 we were growing faster. That is the main worry for us.
Global headwinds on the Indian economy
- As the Indian economy has gradually opened up since 1991, the global economic situation has had spillovers in India.
- Between 2003 and 2008, the Indian economy was averaging between 8% and 9% growth.
- After the collapse of Lehman Brothers, it came down to 6.2%.
- There is always a spillover of global headwinds on the Indian economy not only through trade, but through capital inflows which have been affected.
- This time the Non-Banking Financial Companies [NBFC] crisis has affected the flow of credit to capital goods.
- The demand for capital goods is down, as is car sales. Real estate is in trouble. The flow of credit to some of these sectors, which were an important determinant of sales, has been affected. This has resulted in a spillover in the rest of the economy.
- India’s exports have not been able to keep pace with expectations, especially in labour-intensive sectors like textiles, where Vietnam and Bangladesh have surged ahead.
- India has failed to make use of the preferential market access that was made available through various trade agreements.
What India can do to meet the challenges in the global landscape?
- This is the time we have to worry about fiscal stimulus, not fiscal consolidation.
- Public investment is very critical.
- Then there should be some kind of social spending which affects people in need with a high propensity to consume.
- The reduction of corporate tax will have only a medium-term impact. In the short term, we need to get the money in the hands of the poor which pushes them to the market so aggregate demand gets generated.
- There is also a rise in protectionism. In such a situation, we need to tap the Asian markets. In that context, RCEP [Regional Comprehensive Economic Partnership] is an important initiative.
- RCEP gives us a possibility to integrate the Indian economy and production with the value chains in east-Asian countries.
- There was a lot of pressure from some countries in the RCEP grouping to exclude India. Now that India has got in, this opportunity will not come back.
- Indian industry has grown with the comfort of having a large domestic market. We need to nudge industry to look at global and regional markets, especially for labour-intensive goods.
- One very important critical factor is the competitiveness of the exchange rate. We need to avoid the appreciation of the rupee if we are to strengthen the domestic manufacturing industry. Any appreciation of the rupee facilitates more imports and less exports, adversely affecting domestic production.
- Apart from above, India needs some kind of a strategic assessment of sectors where India can benefit, both as an exporter and importer.
- India needs to change its outlook towards import and export tariffs.
- The government will have to improve regulations for businesses so that they don’t have handicaps vis-a-vis global competitors.
- In auto components, India is a major exporter and can do much better.
- Increase domestic finance and improve governance mechanisms.
- India needs more banks and more financial instruments to go forward.
Conclusion:
If we look at the cost of doing business, it is very high compared to countries in East Asia for reasons such as governance.India should definitely join RCEP, but we need to improve on various indicators to make use of the membership.
Regional Comprehensive Economic Partnership (RCEP)About RCEP
What does the RCEP propose?
Aim:
How important is it? Significance: Globally:
Importance of RCEP for India:
Dangers of joining RCEP:
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