The economic fallout of COVID-19

What can India do to overcome the global slowdown?

The IMF expects global economic growth to be just 3% this year, the lowest since the 2008 global financial crisis. Unlike in 2008, when India was insulated from a global economic meltdown, the economy now is on the ebb, with growth in the first quarter of 2019-20 hitting a six-year low of 5% and growth projections being slashed by agencies for the rest of FY20. What reforms can India pursue at this stage to align its manufacturing and trading activity with global demand patterns and protect itself from the world’s growth pangs? In a conversation moderated by Vikas Dhoot, Nagesh Kumar and N.R. Bhanumurthy look at the challenges and the road ahead. Edited excerpts:


What has changed in the global economy in the last two years which has turned the headwinds India’s way?

Nagesh Kumar: The latest IMF World Economic Outlook says there is a synchronised global economic slowdown. The trigger was probably the trade slowdown. Recently, the WTO also indicated that world trade growth would be 1.2% , down from 3%. So, a very anaemic or even a flat growth rate in trade is pulling down the economy. And because this is the age of global integration, all economies get affected. The trigger also lies in the protectionist tendencies of world economies and the U.S.-China trade war. India is also affected by this and other domestic issues.

N.R. Bhanumurthy: The global slowdown seems to have started in early 2018 largely because of the premature withdrawal of the stimulus that the global economy was introduced to in the post-2008 crisis. Added to that, emerging market economies started showing some weaknesses. Brazil and South Africa have already got into the recessionary stage. A big country like China started slowing down although there are many who say it is deliberate to reduce the overheating the economy was facing. U.S. and China trade policies have worsened the global situation. The most unfortunate consequence of this for India is that compared to 2008, we are not immune to global slowdown. In fact, in 2008 we were growing faster. That is the main worry for us.

Unfortunately, we seem to have realised only now that there is a slowdown. Some of us have argued it started in the second quarter of 2018 when we saw the pressure the domestic economy was facing. I would say that the global slowdown should take away almost 1.5 percentage points off the growth rate. The rest is domestically driven slowdown, with some cyclical and structural factors.

I was looking at some of the numbers from the RBI. One scary number from April 2019 to right now: the net change in non-food credit to the commercial sector actually declined by ₹18,870 crore compared to the accretion of credit by ₹3.5 lakh crore a year ago. That shows the extent of the slowdown. In my view, it is becoming deeper now although the government has taken some measures in this period. My guess is we will be in the 6% growth rate (zone) for some more time.

We thought India’s economy was largely insulated because of a large domestic market. Is there something that has changed in the last two years?

NK: As the Indian economy has gradually opened up since 1991, the global economic situation has had spillovers in India. Between 2003 and 2008, the Indian economy was averaging between 8% and 9% growth. After the collapse of Lehman Brothers, it came down to 6.2%, but we were very solid. There is always a spillover of global headwinds on the Indian economy. Not only through trade, but through capital inflows which have been affected. What has also precipitated this, this time, is the Non-Banking Financial Companies [NBFC] crisis which has affected the flow of credit to capital goods. The demand for capital goods is down, as is car sales. Real estate is in trouble. The flow of credit to some of these sectors, which were an important determinant of sales, has been affected. This has resulted in a spillover in the rest of the economy.


This is the time we have to worry about fiscal stimulus, not fiscal consolidation. There is a slump in demand. Public investment is very critical. Then there should be some kind of social spending which affects people in need with a high propensity to consume. Any cash reaching the poor will find its way into the market quickly. The reduction of corporate tax will have only a medium-term impact. In the short term, we need to get the money in the hands of the poor which pushes them to the market so aggregate demand gets generated and, in the process, we also address the inequalities in recent times.

NRB: If you look at the global context, there are issues about how the U.S.-China trade war should have helped India. We should have done things differently. We started introducing import tariffs when we should have done the reverse. The reduction of corporate tax rates should have been done at the time of introducing the Budget. I am hoping that tariff duties will be reduced by the government.

India’s exports have not been able to keep pace with expectations, especially in labour-intensive sectors like textiles, where Vietnam and Bangladesh have surged ahead. Is there something India can do to meet the challenges in the global landscape?

NK: The dynamism in world trade is in the Eastern side. The Western markets are really flat. There is also a rise in protectionism. In such a situation, we need to tap the Asian markets. In that context, RCEP [Regional Comprehensive Economic Partnership] is an important initiative. It gives us a possibility to integrate the Indian economy and production with the value chains in east-Asian countries.

However, you could be part of a trade agreement and not make use of it. And this is precisely the story of Indian industry. We have failed to make use of the preferential market access that was made available through various trade agreements. Indian industry has grown with the comfort of having a large domestic market. We need to nudge industry to look at global and regional markets, especially for labour-intensive goods.

I think that one very important critical factor is the competitiveness of the exchange rate. We need to avoid the appreciation of the rupee if we are to strengthen the domestic manufacturing industry. Any appreciation of the rupee facilitates more imports and less exports, adversely affecting domestic production.

NRB: I am apprehensive of India joining RCEP. I have found that even the government is not sure what the outcomes of various trade agreements have been. In RCEP, how are we going to manage countries like China? Do we have that kind of expertise? We need some kind of a strategic assessment of sectors where India can benefit, both as an exporter and importer. I’m not sure if we have that kind of data.

Does India need to change its outlook towards import and export tariffs? For instance, when onion prices shoot up, exports are banned below a particular price. How badly does this dent India’s credibility as a global supplier?

NK: Consistency in policies and visibility in the market are very important. You need to be seen as a reliable source of what you’re exporting. But agricultural commodities are more volatile than industrial ones. Crop failures happen, and you need to sometimes go out of the market. It does affect your reliability as an exporter, but in the agricultural commodities market, this is understood as it may be unavoidable sometimes. But there is always a possibility of managing our affairs better by having reserves or surpluses.

NRB: Going back to what Dr. Kumar said about RCEP, if you look at Bangladesh and Vietnam, some companies from India have gone to those places. This is not to say that we are not entirely competitive — we are in the textile sector — but some domestic policies have pushed industries outside the country. We need to set our house right and be clear about our priorities before jumping onto the big wagon called RCEP.

NK: There was a lot of pressure from some countries in the grouping to exclude India. Now that India has got in, this opportunity will not come back. We do not have the luxury of getting our house first in order and then rejoining.

What Dr. Kumar is saying gels well with what former Chinese Premier Wen Jiabao said a few years ago in Singapore. Tracing Chinese economic history, he had said the country prospered whenever it was open to the world, and slipped back in the global economy whenever it closed its doors. ‘If you want to get rid of poverty and develop, you have no option but to open up,’ he had said. Perhaps, that’s the spirit in which RCEP and other trade agreements should be viewed?

NRB: China was extremely competitive on the manufacturing side. They could bulldoze their commodities across the world. Are we in a position to do similar things? We did so with the service sector. But on the manufacturing and industry front — and RCEP is relevant to this — given our current level of productivity and social capital, are we in a position to compete in the next 10-15 years? That is my apprehension. As Dr. Kumar said, trade always improves the welfare of the people. But we need to see who will benefit less and who will benefit more.

In this respect, the government will have to improve regulations for businesses so that they don’t have handicaps vis-a-vis global competitors.

NK: Even on the manufacturing side, it is not that we are not competitive in the entire sector. We do have a fair bit of exports in the pharmaceutical sector. Even in auto components, India is a major exporter. It is not a story which is uniformly bad, but we can do better.

NRB: One analytical chapter of the IMF report talks about policy measures needed to revive growth in emerging market economies. I found two of the five measures interesting: increase domestic finance and improve governance mechanisms. We need to do well in these areas. I am not sure if measures like merging banks are the best idea. We don’t need fewer banks; we need more banks and more financial instruments to go forward. If we look at the cost of doing business, it is very high compared to countries in East Asia for reasons such as governance. We should definitely join RCEP, but we need to improve on various indicators to make use of the membership.

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Printable version | Feb 28, 2021 11:12:38 AM |

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