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December 05, 2019 Thursday 03:53:12 PM IST

Synchronised Global Slowdown and India

Finance

The world is now experiencing a synchronised slowdown and witnessing its slowest growth since the global financial crisis of 2008-09. The growth rate is expected to fall to 3% in 2019.  They are influenced by both global and country specific factors as seen in Chart I.

Why this slow down?

1.Uncertainty in prolonged trade policy
2. Higher tariff
3.Fall in the performance of manufacturing activity and global trade
4.Fall in investment demand for capital goods.

However, service sector has been doing satisfactorily across the globe. As a result, labour market is alive with active wage growth and consumption spending in developed economies. There are initial softening of services sector in USA and EU zone.


 Table 1: Projected Global Growth  and Influencing Factors in Advanced and Emerging Economies

 

Economies

2018 (%)


2019 (%)

Projection

Favourable factors

Negative


Advanced economies

2.3

1.7

1.7%


Strong labour market conditions, policy stimulus

Low rate of rural demand

Emerging Market

4.5


3.9

4.6

Recovery in Argentina, Iran and Turkey

Major slowdown in Brazil, India, Mexico, Russia, USA, China



The projected growth falls down in 2019 but expected to have a recovery in the emerging economies.

Let us examine the factors shown in chart I in detail. As per one study (Amiti, Redding and Weinstein, 2019) import protection (high tariff) by USA led to decline in real income in that country. The trade war with China led to a loss of trade approximately $165 billion in global supply chain during the 11 months in 2018. Higher tariff resulted in increase in the price of goods in USA. That is, there has been a fall in US real income of $ 1.4 billion per month by the end of 2018. The trade war will create unequal impacts in USA and China. The fall in US exports to China due to trade war would cause a 0.5% drop in US GDP while it would be 4% of China’s GDP.

Devaluation and Trade Wars

China tried to devalue its currency (Yuan) to foster exports. Valuation is an official attempt to reduce the external value of a currency in relation to another currency. For example, if Indian rupee is devalued to 77 per dollar from 70:1. It implies that Indian currency’s external value is declined by 10 per cent ((7/100 x 100) so that the price of the Indian products would be falling by 10%. The resultant cheapness of Indian products would attract more foreign demand for Indian items. China pursued this strategy which is expected to have short term achievements. Devaluation can promote exports only if trade partner countries won’t take any retaliation measures. USA already took such measures which affected Chinese exports adversely. It needs to be noted that when two large countries engage in a trade war both countries would suffer losses. Consequently, both USA and China which are the two largest economies of the world now face slowdown in 2019. An additional fact is that the loss to the China would be more than the setback USA in terms of trade war.


As a way out, China started to dump products in other countries like In India. This made such countries to adopt protective measures against China. An issue with India is that our country is a small country in terms of international share in global trade (<2%). When a small country engages in trade war with large countries like China / USA the small countries will be a looser. This has adversely affected India’s exports. As per the latest data on Indian exports, the country’s export only increased by 1.1% in October 2019.
Geo-Political Impact

The shadow of trade war partly fell on India too. This is sometimes called geo- political factor which is a combination of political, economic and military dimensions (Friedman 2019).  All trade wars have geo political dimensions and it can be seen in the case of USA – India trade relations too. Unlike in the past, India has competitive edge in the cases of certain types of steel products and skilled man power. This affects negatively the performance of steel industry and employment in the IT sector in USA. This prompted USA to adopt protectionary measures against India in the form of augmented tariff on Indian steel products and non- tariff barrier on the movement of professionals to USA. The non- tariff barrier is in the form of high visa fee restricting the number of migrated professionals. There are also strict measures against import of Indian generic Pharma products by USA. In fact, these measures partly affected negatively on Indian Economy. It can be noted that export earnings constitute part of the national income of a country.

Another global factor for economic slowdown is the uncertainty in international trade relations. Major uncertainty revolves around ‘BREXIT’ which indicates the attempt of UK to separate from European Union (EU). UK was expected to leave EU in 2018 but does not materialise yet. This creates a lot of uncertainty in the European zone and it has a derived uncertainty on the relation between EU and other countries including India. USA under President Donald Trump has a lot of reservations against Iran and Russia. USA wants its trade partners to keep away from trade and strategic connections with these countries. India has rupee based oil imports from Iran but has come down due to pressure from USA. Russia also extends weapon trade with India on favourable terms. India is not able to pursue a consistent trade policy with these two countries which enhances BOP strain to this country.

Structural Factors


Slowdown is also attributed to structural factors which have a long run impacts on various economies. There is fading productivity in many countries especially in the manufacturing sector. Advanced economies face manpower shortage with increasing ageing population. International migration of labour is a solution but many countries are reluctant to do so. Falling productivity coupled with increasing inequality affected both investment and consumer demand. If productivity cataracts, entrepreneurs have less incentive to invest more and in addition, there has been a stagnation of real income of wage earners. There is a discussion about 99 Vs one per cent in income distribution in the western world. It implies that only real income of the top one per cent is rising but of the others (1%) either remains the same or tumbles down. This reduces consumer demand that leads to slowdown. In the case of inequality, India is not an exception. There is also the issue of trade surplus (China and Japan) vs trade deficit in countries like USA. This also develops trade war among different countries.

Climate change makes undeniable impact on different countries. Unexpected rainfall, flood, prolonged drought, falling quality of air due to pollution etc. enhance the external cost in the world over. Though there is academic consensus on these issues, there is lack of political consensus internationally, especially from USA. Poverty in countries like India also stands in the way of pursuing a sustainable climatic policy. This also affects trade war and economies adversely.

There are more Indo-US specific factors that affect Indian exports to USA. It needs to be noted that USA is one of the major export destinations of India. Technology majors like Google keep data information, especially personal, outside India. It is mainly in USA. Now India demands data localisation, that is to keep data related to Indians and their transactions must be kept in India itself. Similarly India does not provide a widely liberal e-commerce scenario. The country does not want to have a flourishing e-commerce by inflicting harm on the local traders. In this way, there are a lot of tensions between India and USA as far as digital economy is concerned.

Former RBI Governor Raghu Ram Rajan has listed a lot of India specific factors for the economic slowdown. He points out that there is clear fall in investment demand and consumption. In the absence of positive dimension in exports, the decline in the above mentioned two domestic demand factors further augment the slowdown. This is evident though a negative growth in the index of industrial production (-1.1%) in September – October 2019.


India Slowdown

The present slowdown is the result of ill-conceived demonetisation and ill equipped introduction of goods and services tax. The fact was that the economy had the potential of a slowdown around 2015. As demonetisation and GST were introduced immediately after that, both affected the informal economy which employs more than 90% of the workers of the economy.  Rajan also argues that government tries to introduce many welfare measures when revenue to the treasury is not picking up. The country moves towards centralisation of power with less concern about the rationale of economics. Centralisation neglects the diversity of the economy.

Well-conceived policy is necessary to overcome the present crisis. As government follows market friendly supply side approach, it is necessary to augment demand through more fiscal stimulus. It implies that government need to increase public expenditure. It needs to be noted that demonetisation and GST pulled down the confidence of many investors. As suggested by former Prime Minister Dr. Manmohan Singh, the government need to inject confidence among the investors and traders to reduce psychic cost. These are necessary in the absence of favourable global scenario.



S Muraleedharan

The writer is a former Associate Professor of Economics, Maharajas College, Ernakulam and  Visiting Faculty, KNRC, MG University

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