Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
General Studies 2
Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
Important International institutions, agencies and fora- their structure, mandate.
India’s role in a changing global economy
India has become the fastest-growing country even as the global economy has weakened.
This is because – India got benefitted from a confluence of factors — such as the reduced international price of energy and resilience in domestic private consumption.
However, if India has to continue its sustained growth leadership, it should carefully study and assess the global outlook and international policy agenda impacts.
Concerns: We have earlier read that –
Global growth has been underperforming in recent years
Since 2008 financial crisis, the cyclical nature of industrial country growth has been deeper than expected
This underperformance is increasingly structural in nature, i.e. it will affect emerging markets as well
Therefore, this article gives a solution for above concern – It advocates for an urgent requirement for a global policy agenda to address the rising structural weaknesses.
And the article also discusses that India must play a key role in helping to build and implement such a global agenda, as part of the process in sustaining its own growth.
Factors that affect Indian Economy:
Global structural weaknesses deserve to be looked at carefully. They arise from both supply-side factors and demand constraints, affecting global trade, a critical growth engine in recent decades:
Low productivity: Productivity has clearly been falling in industrialised countries, and in emerging markets, leading to supply shortages.
Spillover effects: China’s slowing growth has had significant spillover effects on other countries.
Falling investments and innovations: There is rising consensus that the spillover effects led to falling investment returns, perhaps from slowing innovation that has reduced investment.
(Greater research and increased competition, especially in the service sector, would help raise investment and productivity.)
Poor demand and rising inequalities: The imbalances slowing growth possibly also reflect an overall demand shortfall.
Why has demand slowed down?
Demand was likely boosted by debt in many advanced and emerging market countries, sequentially, and capital is now at the risk of moving out of emerging markets.
Additionally, many believe rising inequalities in advanced countries and key emerging markets have reduced the propensity to consumeand produced what is called a “savings glut” in many countries—the counterpart of a demand-side constraint which feeds the fear of deflation.
Global trade has stalled far below the long-term annual average trade growth of at least 5% until the start of the financial crisis, and even more, in emerging markets.
It is not just cyclical in nature: there is evidence that trade elasticity to income has fallen, especially in the United States and China. Of course, trade liberalisation has slowed significantly with the collapse of the Doha Development Round.
India is and will be affected by all these factors.
Especially on the investment side, corporate investment remains low and higher levels of public infrastructure are needed to meet supply bottlenecks and crowd in private investment.
On the demand side, inequalities have clearly increased in recent years and exports remain weak though India has been relatively protected from the factors affecting China’s reduced trade.
What India should do?
While each of above mentioned factors require concerted domestic policy reforms, India also needs to be fully engaged in the emerging G20-led international policy agenda being developed to deal with global structural weaknesses and raise public investment where fiscal space is available.
Indian markets should remain attractive:
India and many other emerging markets clearly offer higher investment returns—partly on account of their demographics—and should remain attractive to the global savings glut with their deepening international integration.
India should reap the benefits out of WTO trade facilitation and reduced trade costs:
With the failure of the Doha Round to move ahead with multilateral trade liberalisation, other efforts are being proposed to revive trade. Thus far, India has not benefited as much as others like China (as it did after securing World Trade Organization (WTO) membership), from the trade booms in recent decades.
But India has ratified the deal reached by the WTO on trade facilitation, which should, potentially, significantly reduce trade costs.
India should increase its trade integration through more regional and bilateral trade agreements:
A number of regional and bilateral trade agreements have been proposed, some going beyond manufacturing, to cover agriculture, investment, business, and other services where India has comparative strength.
In any case, steps to raise India’s trade integration more quickly in the South Asia region would help catalyse new investment and competition.
India must play a key role in helping to build and implement a global policy agenda
There is the issue of the international monetary system and how it manages the volatility of global liquidity.
Also at stake are the spillovers from domestic monetary policies, especially from the industrialised countries, and their implications for global liquidity.
Therefore, there is an urgent requirement for a global policy agenda to address the rising structural weaknesses and better manage the volatility of global liquidity.
The International Monetary Fund (IMF) is now discussing a road map for strengthening the international monetary system, and India needs to be part of the brainstorming behind it; how to better manage liquidity shocks and deal with external financing needs.
India’s increased role
India’s role is especially important as tomorrow’s key financial players—official and private—will come from emerging markets and their rising financial integration will impact global liquidity.
In order to better manage the volatility of global liquidity, there is a need for a global mechanism.
In the absence of such mechanism, the world will continue to be vulnerable to the sudden drying up of liquidity or of disorderly acceleration in capital flows. This risk, in particular, is now a major concern in the current international monetary situation.
Need of the hour: A transformed and strengthened IMF
India has advocated that the role of IMF should be transformed to act as the global mechanism, with the mandate and instruments that would allow it to regulate global liquidity in addition to its other functions.
IMF should be provided with a stronger governance framework that reflects the rising role of emerging markets, a mandate for effective surveillance, stabilisation of global liquidity and exchange rates, mechanisms for reducing the risk of disorderly spillovers, and for dealing with debt restructuring. Eventually, the IMF would need to be better equipped with a monetary asset instrument to deal with changing global liquidity.
Such a transformed IMF could be charged, in cooperation with national and international central banks, with continuously monitoring global liquidity flows and taking the regulatory decisions needed to manage the same.
Undoubtedly, it will take time to build the necessary global consensus. To achieve it, international public opinion needs to be better informed of the ongoing risks of instability inherent in the current system.
In fact, in today’s climate, it is highly desirable for major stakeholders to take this initiative forward and convene a new Bretton Woods II conference to consider the necessary changes in the Articles of Agreement of the IMF.
Connecting the dots:
Highlight the factors and global structural weaknesses that affect Indian Economy and examine why there is an urgent requirement for India to fully engage in the emerging G20-led international policy agenda to address the rising structural weaknesses.
Highlight why there is an urgent requirement for a transformed and strengthened IMF in a changing global economy.
Supreme Court verdict on Lodha Panel recommendations