Greek philosopher Heraclitus had correctly said that there is nothing permanent except change. How else can one explain the curious findings of the World Bank’s Global Economic Prospect (GEP) report that says the ground beneath the global economy is shifting and the fresh impulses for growth would not come from the developing world, which for many years have been the drivers of global prosperity, but the developed countries.
The one exception is the role reversal of India. The report says that “with an expected growth of 7.5% this year, India is for the first time leading the World Bank’s growth chart of major economies”.
The analysis suggests that all BRICS economies have either slowed down or have been failing to take off. Brazil, given the policy paralysis and political factors, is expected to contract by 1.3% in 2015, while the Russian economy, which has been crippled by sanctions and decline in oil price, could contract by 2.7%. The Chinese will have a softer landing at 7.1% with a policy mix of lower fossil fuel intensity and moving from an investment-export led to consumption-driven growth.
In contrast, the pickup in the US and the sharp recovery in Japan will enable high-income countries to grow by 2% this year, 2.4% in 2016 and 2.7% in 2017 as important contributors to global economic growth of “2.8% this year, 3.3% in 2016 and 3.2% in 2017”. Francesca Assuage, the lead author of this report, argues that after four years of disappointing performance, growth in developing countries is struggling to gain momentum.
One significant factor for this overall asymmetric behaviour emanates from softer commodity and oil prices. This has substantially lowered the economic activity in many emerging markets. Low oil and commodity prices are beneficial to consumers and improves fiscal space for countries depending on energy imports.
However, “there can be no good without evil”. In the perceived good of soft oil and commodity prices, there is embedded the evil for many. The report recognises that in India new reforms are improving business and investor confidence and attracting new capital inflows. This should raise growth to 7.5% this year. In fact, recently, Union finance minister Arun Jaitley in New York said that growth could be 8-8.4%. This clearly puts India ahead in the global growth curve.
But what will India need to remain ahead of the curve?
First, correct the unease that not enough is happening on the ground. Focus on a job creation strategy and make public, at least, once a quarter, the additional jobs created. This is difficult, given the dispersed nature of our employment pattern: Seasonal, disguised and the characteristics of the informal sector. We do need a credible mechanism for collection and dissemination of job data. This will enhance confidence; it will also help in retooling alignment between the government’s skills policy and job creation policy.
Second, the report emphasises the main shadow as the eventual US liftoff. Recent data, however, suggests that while uncertainty persists, action may have been delayed. This is an exogenous risk. The best way to protect ourselves is to pursue fiscally responsible policies, a readiness to recalibrate subsidies if petro and commodity prices harden, strengthen infrastructure, invest in health and education and improve overall competitiveness. Third, revisit our export-promotion strategy. The new export policy is yet to bring in tangible changes.
The current data on exports remains worrying. While it benefits 37% of imports which are oil-dependant, they also dampen revenues from petroleum products that constitute 20% of our exports. Exchange rate volatility, given current and future uncertainties, necessitates that export strategy must look beyond a favourable exchange rate. Taking healthy reserves for granted, we have in recent years forgotten the need for a dynamic, innovative export promotion strategy. We must impart new vigour to the export sector, upgrade products, improve total factor productivity and generate employment.
Fourth, improve the banking system. The Reserve Bank has rightly observed the need to articulate a recapitalisation strategy that goes beyond tinkering. Given the limited fiscal space of the government, the need to revisit the Bank Nationalisation Act by placing greater reliance on market cannot be on the back-burner anymore.
Fifth, institutional asymmetries need resolution. While some tension between the treasury and the central bank is normal and even healthy, monetary policies must be aligned with overall growth objectives. Heads of autonomous institutions cannot be cheerleaders or prophets of doom. Their pronouncements alter expectations which influence decision making.
Sixth, a credible agricultural strategy must move away from subsidy-based farm inputs to public investments. This improves productivity, as we move away from a cereal-based approach to the cropping patterns aligned to changing consumer preferences and mindful of new vulnerabilities due to climate change.
Seventh, constitute an empowered committee on stranded assets. Freeing them will ease the debt-burden of corporates and improve the balance-sheets of banks. Eighth, why does the issue of adversarial tax regime come up repeatedly? We need to institutionalise a mechanism of dialogue with stakeholders to dispel the shadow of this unfortunate legacy.
Finally, while a lot is happening on the ease of doing business and getting to high rank may prove daunting, periodic updates on progress achieved will generate confidence. Both external circumstances and the policy resolve of the new government have placed us in this advantageous position. Addressing these concerns and building on the momentum have gainful multipliers.
NK Singh is a member of the BJP and a former Rajya Sabha MP. The views expressed are personal.