As a developing economy, India holds a lot of potential but it needs to take structural steps to make itself more resilient to shocks
Ever since the great depression hit the world in 1929, a slew of economic crises such as the 1973 oil embargo, the Asian crisis of 1997 and the great recession of 2007-08 followed, challenging the well-established economic theories of respective times. These crises mostly unfolded against the backdrop of a strong belief in free market capitalism, globalisation and increasing deregulation of trade. This, along with the much-hyped ‘new economy’, was widely, at times mistakenly, believed to be the promoter of growth and prosperity. However, contrary to popular belief, economies across the globe have started showing signs of slowdown due to rising debt burden, high interest rates and trade protectionism.
Recently, the International Monetary Fund (IMF), while cutting the global economic forecast for the year 2019-20, said that the global economy is slowing more than expected and a sharp downturn could require world leaders to coordinate stimulus measures. A recent article in the Washington Post titled, ‘Economic growth is slowing all around the world’ said that builders in the US are erecting fewer single-family homes. German factories are sputtering and in China, retail sales are growing at their slowest pace in 15 years. This, though, aptly captures the current state of the global economy and could in the near term precipitate another economic crisis. Furthermore, the World Bank in its recent report titled, ‘Global Economic Prospects — Darkening Skies’ indicated that global economic growth is expected to soften from a downwardly revised three per cent in 2018 to 2.9 per cent in 2019.
However, despite the slowdown in global economies, India’s growth continued to remain strong and bullish with a rate of 8.2 per cent in the first quarter of the fiscal year 2018-19. Until recently, India retained the tag of the fastest-growing largest economy in the world and briefly overtook France to be the sixth largest economy in the world with a Gross Domestic Product rate of $2.61 trillion. This does not imply that India is immune from fluctuations in the global economy. Growth issues faced by our country currently can topple growth ambitions. Global economic headwinds, trade war and the growing number of non-performing assets could wreak havoc in the India market. Hence, it is important for any economy, including India, to adopt a sustainable economic model that is resilient and can withstand occasional hiccups in the economy.
India’s unique geographic advantage and demographic positioning allow it to compete with the developed economies. Further, it has abundant natural resources, intellectual capital, cheap labour and an enabling policy environment. Joseph Stiglitz, in his 2010 book titled, Freefall: America, Free Markets, and the Sinking of the World Economy, says that the great depression coincided with the decline of the US agriculture. Indeed, agricultural prices were falling even before the stock market crash in 1929. Increase in agricultural productivity was so great that a small percentage of the population could produce all the food that the country could consume. The transition from an economy based on agriculture to one where manufacturing predominated was not easy.
The IT revolution earned India a respectable place among the developing economies in the world. But today, 25 years after the IT boom and the liberalisation of the economy, India stands at a historical crossroad wherein it has to choose between building economic resilience or continuing its reliance on the traditional IT services to boost its growth prospects. Paul Krugman, a Nobel Prize-winning economist, during one of his recent India visits remarked that investments in the rural economy and scaling up manufacturing are essential for India to meet the demand for jobs from a dramatic surge in the working age population. The manufacturing sector has been long neglected with much of the activities happening in the small and medium space. With the apparent slowdown in the IT industry and rise in protectionism, the focus must shift to manufacturing and agriculture that can boost growth. Further, reforms in the banking sector, bridging trade deficits and developing the rural economy could script a resounding growth story in the coming years.
The World Bank, in its India biannual publication, ‘India Development Update’, said that to sustain its growth path, India will need to keep a close eye on several factors to make the country more resilient to shocks: The changing landscape of open trade, reforms in the banking sector, strengthening financial institutions and regulatory supervision of the financial sector. Deepening its structural reforms in areas of health, education and service delivery will be critical for development of human capital required to sustain growth. As a developing economy, India still holds a lot of promise and will continue grow at a steady pace despite many challenges.
(The writer is a Communications Professional and an Economics graduate)