India – the shining light in a gloomy world economy
April 25, 2016 | Blog, Uncategorized
India – the shining light in a gloomy world economy
Last week, the International Monetary Fund announced some grim forecasts. The world is not growing fast enough. Global economic output will only grow by 3.2 per cent this year and not by 3.4 per cent as the IMF had calculated in January. The IMF is clearly worried as the world’s economy has grown very slowly for the last five years. Anything close to or less than 3 per cent will make all countries vulnerable to grave and permanent risks. There could be modest improvement in 2017, but it is too early to predict what could happen the year after. Low energy prices, deflated commodity prices and unrest in the Middle east continue to threaten global economic recovery
What is causing this decrease in world output? Firstly, All advanced economies are slowing down. The US will only grow by 2.4 per cent this year. The manufacturing sector in the US continues to suffer and that is a major reason for this slowdown. This year is also an election year and Donald Trump is seen as a major threat to the global economy. Unemployment continues to be high in the US and this could result in some more protectionism. Canada will grow only by 0.6 per cent. Australia will struggle as commodity prices continue to decrease. Japan is still struggling. Over the last two decades, there has been neither any growth nor any inflation.
Secondly, the European Union has still not recovered from the crisis that erupted nearly ten years ago. Germany, Spain, Italy and France will grow at below 1.5 per cent this year. The UK’s economy is the fastest growing in this region at 2.2 per cent. In a couple of months, this June, the United Kingdom will decide whether it wants to stay in the European Union. If it exits, the impact on EU will only be negative. The refugees coming into Europe have caused some severe reactions in most countries. Almost everywhere, the extremist groups and right wing parties are gaining popularity. The decades old open border policy now is in serious threat as Europe seems to retreat from its continental character and go back to narrow nationalist tendencies seen before World War 2.
Thirdly, the Middle East is expected to grow but there is no way in which this growth can be predicted. Saudi Arabia will continue to grow at about 3.6 per cent. The other major oil exporter where growth has been slashed from 4.1 to 2.3 per cent is Nigeria. Russia is actually going negative, a growth rate of minus 4.1 per cent. It is isolated in the world because of its adventures in Ukraine and is also facing the brunt of falling oil prices. Brazil does even worse and continues to slip into sharp recession. All of South America is gripped in the hands of negative growth. South Africa is stagnant. Indonesia and Malaysia are facing similar trouble and ASEAN countries too are slowing down.
However, more than all these countries, the world economy is faltering because of acute problems in the world’s biggest country. China is the major worrying factor as imports and exports continue to go down, investment activity is weakening and the famous manufacturing sector is clearly suffering. Chinese growth rates are supposed to go down to about 6.5 per cent, their lowest in nearly thirty years. Why is China such a big worry? Why is it that the entire world’s fortunes depend on what happens in this large country that has been the fastest growing economy for so long now?
China is today the second largest economy in the world, its GDP crossed 10 trillion dollars last year. It is the largest importer of raw material such as iron ore and various other minerals. It is also the largest consumer of finished goods like iPhones. Therefore, when Chinese consumption slows down, raw material exporting countries like Australia suffer as do firms like Apple and IBM. Also, China has a large manufacturing sector that contributes to nearly 45 per cent of its total output. However, factories there are now suffering from excess capacity, especially in sectors such as steel.
Chinese exports are usually underpriced and with excess capacities will be dumped even more in foreign markets damaging domestic industry. As the Chinese currency gets devalued, exports from China become cheaper and further threaten producers across the world. In the last one year, the Chinese RMB has depreciated by over 6 per cent and that is why China is always castigated for having launched a currency war. The Chinese financial system is already creaking under huge bad debts that the banks have incurred leading to over investment and excess capacity. The Chinese economy is hugely in debt and that is not a great sign for the future as it seeks to tackle slowing growth.
That leaves the one bright spot, as the Prime Minister declared recently, echoing what the IMF chief said in her policy address earlier in April. The Indian economy will be the fastest growing economy in the world this year, with growth rates of around 7.5 per cent. The Indian economy has benefitted from low commodity prices, lower inflation rates and tight fiscal discipline. Subsidies have been reduced and there is hope that private investment will pick up if the climate improves and the government is able to push through some reforms in the labour sector, taxation and in the ease of doing business.
The RBI governor however advises caution and humility. While India is doing relatively better, it is on account of the fact that others are doing poorly. India, he says is still performing far below its potential. A number of other analysts show that with oil at 40$ a barrel, the growth should have been above 9 per cent. The stock market continues to be far below where it should have been and exports have been falling relentlessly over the last 16 months. The private sector is reeling under debt and banks are suffering record levels of Non-Performing Assets and bad loans. It is not enough for us to do relatively better than others; we have to increase our growth rates substantially if we have to reduce poverty. Till then India will continue to be, as Rajan says, the one eyed king in the land of the blind.
Amir Ullah Khan
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