Economic Highlights

New Delhi, 14 February 2014

                                                         World economists Look To India

                                                        SURVIVAL MANTRA: De-GLOBALISE

                                                                       By Shivaji Sarkar

The world has started de-globalising with US taking the lead. But India needs to correct its economic policies and de-couple, according to UN’s latest report on World Economic Situation and Prospects (WESP).

Importantly, the report as anyalsed by UNESCAP and Director ESCAP South and South West Asia chief economist Dr Nagesh Kumar is a testimony of the reversal of economic policies adapted in the post-Soviet era in early 1990s.

Though the report says that the global economy would grow at 3 per cent, it underlines the point that 2013 experienced subdued growth for a second year. In fact, there are many factors and risks that could derail the world economy far beyond the report’s projections, WESP avers. Whereby, risks, including the geo-political tensions in Western Asia are associated with the bumpy exit from the quantitative easing (QE) programmes by the US Federal Reserve which threatens world economy.

The positives, it noted last year too, are end of protracted recession in the Euro Zone and “somewhat strengthening of growth” in the US. The other optimistic signs are some large emerging economies, including India and China. Both “managed to backstop” the deceleration they experienced in the past two years.

However, the pessimism in the report is wide. Despite a better world projection of 4.7 per cent growth for trade, the employment situation will remain bleak. Notably, the WESP warns that international capital flows to emerging economies “are expected to be more volatile”.

Undeniably, this is a soft warning on foreign direct investment (FDI) and short-term portfolio investments by FIIs, which has become a virtual bedrock of the Indian Government’s economic policies. Questionably, will the Government change tack on the economy?

Also, the US fiscal tightening is a severe forewarning. During the past two year US President Barack Obama has been hinting at more indigenization --- less imports and more exports. The Euro Zone too follows the same principles. This will hit Indian and other economies, dependent on export-oriented growth. Wherein, they would have to look for new growth models.

True, India has done well in giving more solar energy related contracts to indigenous organizations leading the US to lodge a complaint with the World Trade Organisation (WTO).This is natural. But India has also to be tough with the WTO. It cannot allow undermining of the country’s sovereignty to benefit a few western powers.

Besides, with the WESP expressing concern over India’s lowest growth in two decades, it is also apprehensive about the high current account deficit and fiscal deficits. Growth has decelerated to 4.8 per cent due to weak household consumption, high inflation, sluggish investment and large capital outflows in 2013.

Adding, that India is virtually on a reverse path that Obama is adopting with less exports and more imports. The suggestion is simple. It wants India to re-orient its policies.

Undoubtedly, the capital outflows resulted in a further depreciation of the rupee in 2013. Wherein, the weakness of the rupee contributed to upward pressures on prices of imported goods which added to inflation. But this has helped exports as prices in the international market slumped. The WESP forecasts a moderate growth of 5.3 per cent in 2014 for India.

Further, it is concerned about factors in India as they impact the growth trends in South Asia. Any upheaval in the Indian economy would affect economies in the region, be it Sri Lanka, Bangladesh, Nepal, Bhutan and even Pakistan which has less linkage with the Indian system.

Pertinently, high inflation has hit the entire region. India with an approximate ten per cent inflation rate is experiencing slowdown and fall in jobs which rose from 3.8 per cent in 2011-12 to 4.7 per cent in men and 7.2 per cent among women in 2012-13 according to the report. Yet, Government data states unemployment is around 11 per cent.

This is not all. Even Iran and Pakistan are seeing more people being jobless. Pakistan saw 18.7 per cent of its women and 6.3 per cent of men without a job. China, it says, is slowing down. Growth in Brazil too has been hampered by weak external demand, volatility in international capital flows and tightening monetary policy.

Among developing regions, only Africa is experiencing some kind of growth. Its GDP is expected to expand by 4.7 per cent in 2014 against 4 per cent now. Markedly, Africa is growing because of growth on investment in infrastructure, trade and investment ties with emerging economies and improvements in economic governance and management.

So far, India is concerned about the financialisation of the commodity market, futures trading, cartelization and hoarding which are creating unprecedented price inflation of all goods, services and commodities.

It also notes that higher FDI by international retailers are acting against the Indian consumers, who have to pay through their nose. This has affected their savings and caused utmost hardships. In a carefully drafted report the WESP notes the failure of Government mechanisms to control this despite the powers they have.

Consequently, the working class is the worst sufferer and overall the large Indian population is finding it difficult to survive. In a previous report by UN Conference for Trade and Development (UNCTAD) had also noted these reasons for dismal performance of the Indian economy.

Indirectly calling upon India to correct its path, WESP warns that the tapering of US Fed’s bond buying programme could result in significant capital outflows requiring further monetary tightening in the country. This means the Reserve Bank would have to take up more stringent measures, hike interest rates and keep a close watch on monetary movement.

Moreover, the WESP has virtually found holes in every Government policy. This could weigh on economic growth. In addition, the report has come down heavily on subsidy cuts on food and energy. Depreciation of the rupee is yet another factor for concern.

These would lead to higher consumer price inflation in 2014 apart from slowing down household spending and domestic demand. What's more, this leaves little room for monetary easing.

The WESP suggests that India have a relook on its globalised economic policy. This means the Government’s policy parameters have to be decided independently and not influenced by corporates for increasing profits.

This certainly requires courage to do. With the UPA Government running out of time it remains to be seen if the new Government is able to take India on an independent course? It is just not Indian voters but economists across the globe who await India to usher in that change. The mantra once again is de-globalise. ---- INFA

(Copyright, India News and Feature Alliance)