Economic Highlights

New Delhi, 2 May 2016

Asian Economy In Disarray

TAX REFORMS, RURAL SHIFT VITAL

By Shivaji Sarkar

The world economy is in disarray and increasing productivity is a herculean task, states the UN Economic and Social Commission for Asia and the Pacific (ESCAP) in its annual Economic and Social Survey for Asia and Pacific 2016. Criticizing the tax system, it calls for having a fair tax regime which is the key to stopping flight of capital from the region including India.

Undoubtedly, this is an indirect reference to the Panama papers.

Besides, Asia is the most vulnerable as annual average growth of productivity of developing nations has declined to below one per cent during 2008-2014 against 2.8 per cent in 2000-2007.

The panacea, it feels is in rural and agricultural development, a step India is appreciated to have taken. And, it is critical of shift in many areas from farm-based economy to services. Without the basics, it argues, services cannot lead the growth of economies, warning that the region must not ignore the fundamentals of the economics of primary areas like farms and manufacturing.

The Survey estimates that a modest increase in agricultural productivity could lift an additional 110 million people out of poverty by 2030. But cautions it is not an easy task requiring improvements in knowledge and skills.

Besides, as the population increases, absorption of the large pools of surplus labour in the rural sector becomes critical. It also notes that people’s purchasing capacity has dwindled. Consequently, disparity has increased as growth slows down.

Importantly, steady growth in real wages is crucial for tackling poverty and inequality, as well as supporting domestic demand. If these are addressed the goal for productivity growth could be achieved.

Moreover, slow growth is likely to further impact the next phase of Asia-Pacific economic growth. India and the sub-Continent seem to be in a better position but ESCAP warns against any further easing of monetary policy. This is a gentle way of asserting that interest rates should not be lowered as it hits the poor and vulnerable population, who earn less as deposit rates are slashed.

It also hints that easing of policies make public deposits in banks and other financial institutions soft target for big sharks, which treat the poor man’s savings as easy money and soft target.

Shockingly, the productivity slowdown accounts for almost a fifth of the recent economic slowdown, from an average of 9.4 per cent during 2005-2007 to an estimated 4.6 per cent growth in 2015. ESCAP underscores that this is a concern because sustained and resilient economic and productivity growth, backed by balanced economic, social and environmental development, is a prerequisite for successful implementation of the 2030 sustainable development agenda.

The slowdown is likely to make achieving the 2030 sustainable development (SDG) target difficult. In reality, the UN could not achieve its Millennium Development Goal (MDG) 2015. It was only repackaged as SDG 2030. Now that too seems beyond reach.

Worse, the progress in reducing poverty is slowing resulting in inequalities rising in most of the region. Though statistically, poverty in India has reduced, there is circumspection as disparity has increased and caused severe problems not only for the poor but even for the middle class.

In addition, an expanding middle class and rapid urbanization are also posing complex economic, social, environmental and governance challenges. If these are not addressed properly there are apprehensions that the middle class, supposedly the engine of growth, might lose their economic strength and slip below the poverty line.

The region also faces increased financial volatility and capital outflows, which have limited the space for monetary policy manoeuvring, despite low overall inflation. This is possibly linked to taxes, ESCAP hints.

Further, several countries are also experiencing a private debt overhang after rapid increases in household and corporate leverage in recent years. This is an indirect reference to the high Non Performing Assets (NPAs) read losses of Indian banks which is a growing burden across the region.

This is not all. The solution is not in exports as the global meltdown would make it difficult to sell goods abroad thanks to the purchasing power having reached critical stages. The region has to shift to domestic demand and place greater focus on productivity along with commensurate increases in real wages, it emphasizes.

Underscoring, stagnating wages and not real low prices, are hitting the people, particularly the poor, hard. It also obliquely hints at the problems the middle class are facing as it looses the economic gains with overall costs rising leading to life becoming difficult.

According to ESCAP, a productivity-driven, wage-led approach would enable countries to increase their aggregate supply and demand, thereby enhancing well-being.

To boost productivity, the Survey recommends a cross-sectoral and integrated approach. It notes that several countries in the region are de-industrializing too early in their development, by shifting from agriculture-based economies to ones in which services play a dominant role.

With more than half of the region’s population living in rural areas, and four out of ten workers engaged in agriculture, efforts should instead be strengthened to boost agricultural productivity and foster rural industrialization and urban-rural linkages.

ESCAP calls for continued rebalancing towards domestic and regional demand, as prospects for export-led growth remain subdued. A confluence of macro-economic risks including shifts in global financial and commodities cycles has also increased uncertainty.

“Fiscal initiatives should be underpinned by sustained reforms towards an efficient and fair tax system that delivers the necessary revenues and promotes equity.” Given the Asia-Pacific region’s diversity, it highlights specific policy issues, such as improving female labour participation in the Indian sub-Continent.

Enhancing resilience to natural disasters in the Pacific; dealing with population ageing challenges in East and North-East Asia; economic diversification and services sector development in North and Central Asia; as well as tax policy and administration reforms in South-East Asia.

Highlighting that despite emerging challenges the region’s economic outlook is broadly stable it forecasts a moderate pick up in economic growth in developing Asia and the Pacific to 4.8 per cent in 2016 and 5 per cent in 2017.

In sum, the next phase of Asia-Pacific economic growth has to be driven by broad-based productivity gains, through higher, targeted fiscal spending, enhanced skills, better infrastructure, and improved agricultural productivity. ---- INFA

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