Looking Beyond Green Shoots

Unless key issues are addressed, even if growth bounces back from the sub-5 per cent, it will stay lower than the already inadequate long-term average of 6.6%, writes T N Ninan

The government is probably right to argue that the economy has bottomed out. That view gets support from the quarterly growth figures released on Friday, and is broadly endorsed by economists at investment banks. International organisations like the World Bank and International Monetary Fund (IMF) also forecast a mild recovery for India in the coming year. The consensus is that the worst is over, and the downturn has ended. This has encouraged government spokesmen to argue that what the economy has been through is little more than a cyclical trough — abetted by troubles in the financial sector, which too are coming to an end.

We should be careful about such predictions, based on partial analysis of predominantly domestic factors. For, however weak India’s economic linkages are with the rest of the world, its economic performance seems to move in line with global trends, though not in lock step. Thus the years of rapid growth for India in the first decade of the new century mirrored exceptional global growth that averaged 4.2 per cent (World Bank numbers). Compared to that, the five years till 2019 saw global growth drop by a third, to 2.8 per cent. Indian growth too has dropped sharply in the most recent years.

The other BRICS economies tell a broadly similar story, though not for exactly the same years. Russian growth has dropped from about 7 per cent in the high-growth years to half of 1 per cent in the most recent period. Brazil, prone to large swings, recorded 4 per cent growth in the four years to 2013 before slipping deep into negative territory. It has managed barely 1 per cent in the three most recent years. China too has slowed down, managing growth at just half of its best years, and will slip further in the wake of the Coronavirus outbreak.

Other emerging markets tell a similar story: Turkey’s drop, for instance, is from 8 per cent in the best years to 5.5 per cent, and now to less than 3 per cent in the last couple of years. When these very different economies tell the same story of rapid growth yielding to more modest numbers, we should be paying more attention to international trends, especially those in other emerging markets.

Four issues are of note. The first is the danger of Coronavirus becoming a pandemic — a risk that has entered the consciousness of markets everywhere. The second is the slowdown in the global growth of trade. The World Trade Organization puts growth in global merchandise trade at the same rate as economic growth, when for nearly two decades trade growth had averaged a 40 per cent faster rate than the world economy. The change is partly because of friction between countries and consequential protectionism, but there are other reasons as well. No quick recovery of trade should be expected.

A third factor is what the World Bank notes as a slowdown in productivity growth across emerging markets. This is certainly evident in India, since economic growth has dropped more than investment rates. In other words, India now needs more investment than before, for delivering the same rate of growth. Finally, there are the risks that come with the global pile-up of debt, creating abnormal money markets with an abundance of negative investment rates. A former chief economic advisor has suggested that India is one of the countries more vulnerable to potential shocks.

All these come on top of the domestic challenges of raising savings and investment rates, improving human resources, boosting productivity levels on farms (mostly at barely half of international levels), finding solutions for the worsening fiscal stress, creating jobs through the right mix of policies, and making government intervention in markets less disruptive. Even as the cyclical factors play out, the speed and quality of the recovery will depend on these long-neglected tasks being addressed. Absent that, while growth will bounce back from the current sub-5 per cent, it will stay lower than the already inadequate long-term average of 6.6 per cent. As unsatisfactory as that may be, in the current global context it will nevertheless be something to be grateful for.