EDITORIAL ANALYSIS–Global Economic Slowdown : Implications for India
The Editorial covers GS paper 3 [Indian Economy]
The newly released IMF World Economic Outlook (WEO) has enlisted that there is a synchronised global economic slowdown and the global economic growth to be just 3% this year, the lowest since the 2008 global financial crisis.
IMF has released the 2019 World Economic Outlook (WEO) in which India retains its rank as the world’s fastest-growing major economy.
What is Global Perspective?
- IMF World Economic Outlook says there is a synchronised global economic slowdown. And because this is the age of global integration, all economies get affected.
- The report also mentioned that the world economy is projected to grow only 3 per cent this year and 3.4 per cent next year amid a “synchronised slowdown“.
- Recently, the WTO also indicated that world trade growth would be 1.2 %, down from 3%. So, a very anaemic or even a flat growth rate in trade is pulling down the economy.
- In the case of European countries, growth is projected to be only 1.2 per cent this year and 1.4 next year.
- The United States is expected to slightly better with a 2.1 per cent growth projected for this year and 2.4 per cent for the next.
What are the reasons for the slowdown?
- Rising trade barriers
- Uncertainty surrounding trade and geopolitics
- Structural factors
- Low productivity growth
- An ageing population in developed countries.
What has led to global Economic slowdown?
- Protectionist Tendencies of World Economics: The trigger for global economic slowdown lies in the protectionist nature of the most developed economies.
- US-China Trade War: Due to the wake of US-China trade war, all major economies in the world get affected as this is the age of global integration. U.S. and China trade policies have worsened the global situation.
- Premature withdrawal of the stimulus: The global slowdown seems to have started largely because of the premature withdrawal of the stimulus that the global economy was introduced to in the post-2008 crisis.
- Weaknesses of Emerging Economics: Emerging market economics like Brazil and South Africa has started showing some weaknesses and they have already got into the recessionary stage.
- A Decline in Global Equity Prices: Ongoing negotiations, trade tensions among major economies combined with concerns about softening global growth prospects, have weighed on investor sentiment and contributed to declines in global equity prices.
- Trade Tensions: Rising trade tensions are another major downside risk to the global outlook. If all tariffs under consideration were implemented, they would affect about 5 per cent of global trade flows and could dampen growth in the economies involved, leading to negative global spillovers.
- Tightening Financial Conditions: A sharper-than-expected tightening of global financing conditions, or a renewed rapid appreciation of the US dollar, could exert further downward pressure on global economies.
What led India to streamline itself to the course of economic slowdown?
- Opening up of Economy: As the Indian economy has gradually opened up since 1991, the global economic situation has had spillovers in India.
- Collapse of Lehman Brothers: 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%.
- Large Capital Inflows to the Economy: There is always a spillover of global headwinds on the Indian economy. Not only through trade, but through capital inflows which have been affected.
- NBFC Crisis: NBFC crisis which 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.
What are the implications for India?
- Focus on Fiscal Stimulus: In spite of focusing on fiscal consolidation, the Indian government must have to worry about fiscal stimulus as the public investment is very critical.
- Increased Public Spending: There should be some kind of social spending that affects people in need with a high propensity to consume.
- Reduction of the Corporate tax: Along with the more public spending, the reduction of corporate tax will have a significant impact on the fiscal stimulus.
- Influx of Money to the hand of poor: In the short term scenario, the government should influx money to the hands of the poor for generating demand in the economy which further pushes them to the market.
- Rid of the ill-effect of the US-China trade war: India needs to focus on how the U.S.-China trade war should have helped India. India should have adopted different approaches by maintaining import tariff duties.
- Looking to the Asian Market: Now, World Economics tilted towards the eastern side and there is a sharp rise in protectionism. In such a scenario, India needs to tap the Asian markets.
- Expanding Indian Industry to the Foreign Market: 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.
- Avoid the Appropriation of the Rupee: India needs to avoid the appreciation of the rupee. Any appreciation of the rupee facilitates more imports and less exports, adversely affecting domestic production.
- Proper Strategic Assessment of the Sectors: India must initiate a strategic assessment of the various sectors in order to get better inside of the health of the sector, under which India can benefit, both as an exporter and importer.
- Improving Regulations: In this respect, the government will have to improve regulations for businesses so that they don’t have handicaps vis-a-vis global competitors.
The performance of the India economy as compared to other emerging economics are quite good and the economy able to deliver growth slightly above its potential.
Taking note of the global economy, India needs to increase domestic finance along with improving the governance mechanism in the country.