Global Economic Slowdown: Implications for India

Global Economic Slowdown: Implications for India

Updated on 18 October, 2019

GS3 Economy Current Affairs
global-economic-slowdown-implications-for-india

The newly released IMF World Economic Outlook (WEO) has enlisted that there is a synchronized global economic slowdown and the global economic growth to be just 3% this year, the lowest since the 2008 global financial crisis. Highlights of the IMF’s 2019 World Economic Outlook (WEO): IMF has released the 2019 World Economic Outlook (WEO) in which India retains its rank as the world’s fastest-growing major economy. Global Perspective: Global Economic Slowdown: Implications for India

  • 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 percent this year and 3.4 percent 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 anemic 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 percent this year and 1.4 next year.
  • The United States is expected to slightly better with a 2.1 percent growth projected for this year and 2.4 percent for the next.

Reasons for the slowdown of the World Economy as mentioned in the released report are enlisted in the below section:

  • Rising trade barriers
  • Uncertainty surrounding trade and geopolitics
  • Structural factors
  • Low productivity growth 
  • An aging population in developed countries.

India on IMF’s World Economic Report:

  • The report has enlisted the projected growth rate of 6.1 percent for the current fiscal year, despite an almost one percent cut in the forecast.
  • However, the report also mentioned that India’s economy is projected to pick up and grow by 7 percent in the 2020 fiscal year.
  • In the case of India, the growth projections hitting a six-year low in the first quarter of 2019-20 and the projections also skewed by agencies for the rest of FY20.

Reasons for the Cut in Growth:

  • Sector Specific Weaknesses: Sector-specific weaknesses in the automobile sector and real estate, as well as the lingering uncertainty of NBFCs, are the main reasons for the cutting down of India’s growth projections.
Need to Know about Trade War  
A trade war is when a nation imposes tariffs on imports and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade. Origin of Trade War: The idea of the trade war initiated by the US President when he decided to unilaterally impose a tariff of 25% on steel imports into the US and a tariff of 10% on aluminum imports in March 2018. 
  • The European Union also joined the trade war this month, imposing tariffs on $3.3 billion of American goods. 
Consequences: A trade war starts when a nation attempts to protect the domestic industry and create jobs. 
  • In the short run, it may work. But in the long run, trade war costs jobs and depresses economic growth for all countries involved. 
US-China Trade War:
    • U.S. politicians have long threatened a trade war with America's largest trading partner in goods. A trade deficit occurs when exports are less than imports.
    • In 2017, the United States exported $130 billion to China. The three largest export categories are aircraft ($16 billion), soybeans, ($12 billion), and automobiles ($11 billion). 
    • U.S. imports from China were $506 billion. But a lot of the imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. As a result, tariffs hurt U.S. corporations as well as foreign ones.
  • China is the world's No.1 exporter. Its comparative advantage is that it can produce consumer goods at lower costs than other countries can
  • American companies can't compete with China's low costs, so it loses U.S. manufacturing jobs. Americans, of course, want these goods for the lowest prices. Most are not willing to pay more for "Made in America.”
 
  • Corporate and environmental regulatory uncertainty: Apart from this, corporate and environmental regulatory uncertainty” are other factors that weighed on demand.

Brief Analysis of the Issue:  

  • What led to the 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 the 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 percent 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. 
  • The 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. 

 

  • 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.
  • An 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.
  • In that context, RCEP (Regional Comprehensive Economic Partnership) can give a possibility to integrate the Indian economy and production with the value chains in east-Asian countries.
  • 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 labor-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.

Way Ahead: The performance of the India economy as compared to other emerging economics is 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. In order to keep the growth momentum, the government urgently needs to invest in people to foster inclusive growth. Apart from this, India also focuses on other parameters like:

  • Improving Ease of Doing Business: The room for improving ease of doing business should be filled by reducing the cost of entry and the cost of operating in the informal sector.
  • Creating better business Climate: In order to improve the business climate, India should put forward measures to reduce the cost, time and complexity of registration.
  • Skilling Initiative: India needs to formulate policies to target the informal sector employees to equip them with various skills that help their transition into formal employment.
  • Domestic Reform: The government should work on domestic revenue mobilization and also need to deepen fiscal reforms aimed at contributing expenditures.
  • Securing the economy from the global Conditions: Global financial markets are in stress, in that scenario, India should strengthen buffers against the risk of less favorable global financial conditions.
  • Stimulating Potential of the Economic Growth: Step should be taken to enhance human capital, encourage regional economic integration.
  • Flexibility for SME’s: India also needs to lower barriers to investment for small- and medium-sized enterprises (SMEs) will effectively boost potential growth and help tackle challenges associated with high informality.

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Categories : indianeconomy, internationalissues,
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