- After the recession of 2008, the world recovery has been slow and while for most of the countries, high or higher growth rate might be ambiguous or illusionary India has great opportunity before it.
- Post 2008 recession the global economy has recovered at a tepid rate of around 2.5% per annum.
- Now what is noticeable is – that this recovery rate has been much lower than that after World War II.
- The end of World War II brought a baby boom to many countries, especially Western ones.
- But for the baby boom and the massive rebuilding of economies after World War II, the fact is global growth never topped 3%
- When considered relatively with pre World War II period, the period between World War II and the financial crisis was characterized by population growth, major investment, productivity gains, increases in global trade and cross-border flows of people — a debt boom.
- Today, in most countries, these trends are decelerating.
Cause of the Slow Global Growth
- The major reason behind this tepid global economic growth is the demographic cause of declining population.
- For most countries, a declining population was already on the way prior to the financial crisis
- Population growth boosts economic growth through an increase in the workforce, aided by an increase in productivity.
- Apart from the demographic aspect, on the economic font; protectionism, de-leveraging and no major productivity-enhancing revolution are the other major causes of the current
- However, it cannot be refused that political manipulation and power mongering has a major role to play in this slow economic growth.
- Though for most of the countries the situation does not appear very favorable, but for India, there lies a great opportunity.
- India is about to enter the phase of a demographic dividend which would be an impetus to growth, if the new entrants to the work force are productively employed.
- The government has recognized the need for jobs and embarked on a multi-pronged strategy
- This strategy encompasses
- corporate governance reform
- pro-growth tax reform
- agricultural reform
- government administration reform
- the expansion of public-private partnerships
- increasing jobs through targeted manufacturing/service investment in sectors like tourism, health, education, micro and small enterprises, agribusiness
- massive drive in all these areas and efficient and continuous functioning of drives like Make in India, Skill India
- productivity-based infrastructure development and
- initiatives related to the ease of doing business.
Result of these Strategies
- These strategies have begun to make a difference and should, over a reasonable period of time, create the jobs that are needed.
- The rationalization of subsidies and direct cash transfers will plug leakages associated with the previous subsidy regime and make money available for merit subsidies — health, education, etc. — that can help us exploit our population dividend.
Hurdles that Stands in Front of India
- The global financial crisis largely passed India by; so, our need for quantitative easing was limited.
- But we have created our own crisis — non-performing assets (NPA).
- Furthermore, an ADB report suggests that a growth slowdown of 1.6 percentage points in China would bring about a growth deceleration of 0.26 percentage points in developing Asia as a whole.
- Meanwhile, India is most insulated from China’s slowdown: Its annual GDP growth could be lower by a slight 0.14 percentage points.
India has an Opportunity. How?
- Unfortunately, the tech-based productivity revolution largely passed India by, so did — fortunately — the money revolution
- India’s debt to GDP ratio is 68 per cent. We are now poised to leapfrog directly into the digital world and reap the productivity gains.
- Secondly, with growing political uncertainty in the US, the emergence of protectionist policies and amidst slowdown concerns related to China, countries whose GDP is dependent on exports could find themselves with increased instability.
- The most affected are those with exports accounting for a high percentage of their GDP and with low domestic demand support.
- Thus India appears to be less vulnerable on these fronts.
- Despite the US’s importance as a market for India and Japan shipments to the US make up only 2 per cent and 3 per cent of their respective GDPs.
- The larger and more diverse nature of these economies provides them with some cushioning from protectionist trade policies of US.
- With roughly 59 per cent share in India’s GDP, household consumption spending has been the major driver of economic growth and has, on many occasions, acted as a protective shield to global demand shocks.
- India also has low reliance on external savings to fund its growth.
- The Indian banks are mainly deposit-funded and don’t rely on wholesale funding to grow their loan books
What India Needs to Do?
- The priorities should be focusing on the ease of doing business, infrastructure improvement, fiscal reforms — such as GST — agriculture reforms, administrative reforms, conservation, labor reforms and the digital revolution
- Manufacturing has to be expanded so as to increase output and employment opportunities and quality up gradation has also to be taken care of so that Indian products can compete and survive in the global competition.
- The above factors combined with the increase in consumption through workforce increase, should impact both consumption and investment, leading to the delta required to take our GDP past 8 per cent.
- In a changing world the economic leaders are likely to be countries that less reliant on global trade, domestic consumption-driven, with an increasing population, a scope for productivity improvement and a low per capita base.
- It would be fair to conclude that India’s GDP growth rate of 7.5 per cent is good and sustainable: So also is the potential target of 8 per cent plus.
- Given the condition that India works efficiently towards the target and simultaneously taps its peripheral opportunities, it will definitely come out as an global economic giant.