By Gyan Pathak
Thanks to its strong economic fundamentals, India has finally earned the ‘the fastest growing economy’ of the world tag in spite of its being home to the largest number of illiterates and poor of the world, and the recent economic policy experiments and misadventures. It is now time to prepare for the uncertainties and risks lying ahead, as the International Monetary Fund (IMF) points out in its latest Regional Economic Outlook for Asia and the Pacific.
About 75 per cent of the total economic growth of Asia comes from India and China alone, which makes the continent the main engine of the world’s economy, accounting for more than 60 percent of global growth. The present ruling establishment is trying its best to exploit the tag by putting it forward as proof of its good performance. It is obvious that party propagandist may use the tag to mask the failures and misadventures of the government on almost every front. It may prove to be the best tool for the Modi government in this election year. But the fact is that the earlier governments contributed a lot by successfully creating strong economic fundamentals.
It should be kept in mind that the economic growth based on gross domestic product (GDP) of a county is purely economic accounting, and does not reflect the ground realities, unless we take a closer look at the details in each category of economic activity. Moreover, it totally disregards human development, the index of which includes primarily education, health, gender equality etc. It also disregards happiness of the people, the index of which mainly includes crime, corruption, and poverty.
Even if economic growth, which is generally perceived as the indicator of development, is taken for granted, India needs to tread carefully. The IMF report warns that there are risks and challenges ahead, including from a tightening of global financial conditions, a shift toward inward-looking policies, and — over the longer run — population aging, slowing productivity growth, and the rise of the digital economy. A sense of good times in the present is thus laced with the prospects of uncertain times waiting ahead. This is not a matter of complacency, neither for the people nor for the government.
As we already know, and is acknowledged by several documents of the government of India, we have lost precious time and money in Modi’s policy experiments and misadventures, such as demonetization and implementation of goods and service tax (GST) without proper preparations. We have lost hundreds of crores in these two experiments, which only slowed down the economic growth of the county. There are several other omissions and commissions of the government leading to hardship of the people and breeding corruption in the system, as we have seen in the largest ever bank frauds and banking crisis. We could not extract the full benefit of even the savings in petroleum products due to the fall in the international prices of crude oil. These are all due to the mishandling of the economy by the present government. The strong economic fundamentals of our country sustained and absorbed all internal and external economic shocks and enabled us to achieve higher growth. Even the IMF report says that India has overcome the economic shocks of demonetization and implementation of GST.
IMF has its own limitations and cannot say things that are not ‘politically correct’ about any country or government. Everything is said in a guarded language that only implies meanings. However, it said “In India, growth is forecast to rebound to 7.4 percent in FY 2018/19 as the economy recovers from disruptions related to the currency exchange initiative and the rollout of the new Goods and Services Tax.” Growth rate will further improve to 7.8 per cent in FY 2019-20, the report predicts, but with a rider that there are both upsides and downsides to the forecast. Although they largely balance out in the near term—over the medium term, the downside risks dominate. Asia is vulnerable to a tightening of global financial conditions, spurred by higher U.S. interest rates, which could trigger capital outflows.
If it happens India may not be able to contain the fiscal deficit, which will prevent the government from increasing public spending needed for the well-being of people. There are predictions that the rise in domestic demand of petroleum and their global price will have inflationary pressures on the Indian economy.
The report admits that a global shift toward inward-looking policies would be worrying, given Asia’s trade openness — suppressing Asia’s exports and reducing foreign direct investment in the region. Escalating geopolitical risks as well as natural disasters and cyber attacks could also negatively impact the region’s medium-term growth.
Subdued inflation has provided not only our country but also the whole of Asia the scope for a continued supportive monetary policy stance, says the report. However, it warns that policymakers should be vigilant towards any early signs of inflationary pressure. Strengthening monetary policy frameworks and central bank communications can bolster the importance of expectations, and exchange rate flexibility can help insulate economies from imported inflation. Countries should also focus on macro prudential policies — i.e., policies to reduce financial booms and busts — to lower risks in the financial system. Policymakers should focus on keeping debt under control, and in some economies, a priority is to mobilize higher government revenues to create the room for more spending on infrastructure, healthcare, and education and help support the necessary structural reforms, it says.
For durable growth benefitting everyone, India needs economic conservatism rather than economic adventurism as we have been seeing for the last four years. “Given the many uncertainties, macroeconomic policies should be conservative and aimed at building buffers and increasing resilience,” recommends the IMF. (IPA Service)
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