Prologue RITES Journal 8.1 July 2013 Global Economic Resurgence : Hopes for Developing Economies Dhanendra Kumar Former Chairperson, Competition Commission of India, Former Executive Director, World Bank and Presently Principal Adviser, Indian Institute of Corporate Affairs Ministry of Corporate Affairs.* There has been a global economic resurgence of late which provides rays of hope for all countries and particularly to the developing economies. The Author, who has vast experience in various sectors of the economy like industry, finance and competition, gives a round-up of the state of the economies of countries across continents – advanced, developing, emerging (including India), and also gives an assessment of their growth in the coming years. Dhanendra Kumar, former Executive Director at the World Bank, does caution about the external risks that could be faced by the developing economies and the reasons for the same. A very informative and analytical Article which would of particular interest to all economists. - Editor Overview of Global Resurgence The recent sharp turbulence in the Rupee, the volatility in the stock market and the fluctuations in capital flows have brought into focus some of the issues related to close linkages of global economy. Various reasons have been attributed, the initial slide to regained dollar strength and certain comments from Federal Reserve Chairman Ben Bernanke. Altogether, it does underline the fact that in the present times, global economy is intertwined as never before. Nevertheless, there is a general recognition that after a long spell of economic gloom, the global economy appears to be transitioning into a smoother and less volatile period. Financial market conditions *With inputs from Akshita Jain and Tushar Garg – gratefully acknowledged.
Transcript
Prologue
RITES Journal 8.1 July 2013
Global Economic Resurgence :Hopes for Developing Economies
Dhanendra KumarFormer Chairperson, Competition Commission of India,
Former Executive Director, World Bankand
Presently Principal Adviser, Indian Institute of Corporate AffairsMinistry of Corporate Affairs.*
There has been a global economicresurgence of late which provides raysof hope for all countries and particularlyto the developing economies.
The Author, who has vast experience invarious sectors of the economy likeindustry, finance and competition, givesa round-up of the state of the economiesof countries across continents –advanced, developing, emerging(including India), and also gives an
assessment of their growth in the comingyears.
Dhanendra Kumar, former ExecutiveDirector at the World Bank, does cautionabout the external risks that could befaced by the developing economies andthe reasons for the same.
A very informative and analytical Articlewhich would of particular interest to alleconomists.
- Editor
Overview of Global Resurgence
The recent sharp turbulence in the Rupee, the volatility in the stock marketand the fluctuations in capital flows have brought into focus some of the issuesrelated to close linkages of global economy. Various reasons have been attributed,the initial slide to regained dollar strength and certain comments from Federal ReserveChairman Ben Bernanke. Altogether, it does underline the fact that in the presenttimes, global economy is intertwined as never before. Nevertheless, there is a generalrecognition that after a long spell of economic gloom, the global economy appears tobe transitioning into a smoother and less volatile period. Financial market conditions
*With inputs from Akshita Jain and Tushar Garg – gratefully acknowledged.
8.2 Global Economic Resurgence :Hopes for Developing Economies
have improved significantly since June 2012, and although high-income countriesstill face serious challenges, the likelihood of a major crisis has declined. The GDPgrowth expectations below are revealing (Table 1).
Table 1 : GDP Growth Expectations (%)
2010 2011 2012 2013 (f) 2014 (f)
World 4.1 2.7 2.5 3.0 3.3High Income 3.0 1.6 1.4 1.9 2.3 Euro 1.8 1.6 -0.3 0.7 1.4 USA 2.0 1.7 2.1 2.4 2.8 Japan 4.5 -0.7 2.4 1.5 1.5Developing 7.4 6.1 5.3 5.9 6.0 China 9.7 8.3 7.6 8.1 7.9 India 8.4 6.5 6.9 7.2 7.4 Russia 4.3 4.3 3.8 4.2 4.0 Brazil 7.5 2.7 2.9 4.2 3.9 S. Africa 2.9 3.1 2.7 3.4 6.6
Source : World Bank.(f) - Forecast.
Overall, the high-income growth is expected to gradually strengthen from1.4 percent (2012) to 2.3 percent by 2014-15.
A large number of developing countries have almost fully recovered from thecrisis. Some countries even face the risk of overheating if policies do not addressthis in a timely manner. In developing Europe, the recovery remains incomplete withunemployment, and spare capacity as central problems. New risks and challengesinclude quantitative easing in Japan, and its withdrawal in the United States. Lowercommodity prices are a potential concern for commodity exporters, while assetprice bubbles and excess leveraging could be a problem among fast growing EastAsian economies.1
According to the World Bank, global GDP is projected to increase 2.5% in2012, with growth accelerating to 3.0% and 3.3% in 2013 and 2014. High-incomenation’s GDP is expected to expand by 1.4% this year weighed down by bankingsector deleveraging and ongoing fiscal consolidation. As these pressures ease in2013 and 2014, high-income country GDP growth is projected to firm up to a modest1.9% and 2.3% in 2013 and 2014.
These drags on growth are expected to ease somewhat, and global growthstrengthen during 2013 and 2014, although both developing-country and high-incomecountry GDP will grow less quickly than during the pre-crisis years. An importantpoint here is that the forecast for India, which is made post our FY12 performance of6.5%, is still steady at 6.9%. This is lower than Ministry of Finance number of 7.6%and almost the same as 7% of RBI.
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According to IMF, global prospects have improved again but the road torecovery in the advanced economies will remain bumpy. World output growth isforecast to reach 3¼ percent in 2013 and 4 percent in 2014 (Table 2). In its twice-yearly Economic Outlook, the Organization for Economic Cooperation andDevelopment (OECD) forecast the world economy would grow 3.1 percent this yearbefore accelerating to 4 percent in 2014. The estimates marked a slightly morepessimistic view after in November the Paris-based think tank forecast global growthof 3.4 percent this year and 4.2 percent next year.
Emerging market and developing economies are still going strong, but inadvanced economies, there appears to be a growing bifurcation between the UnitedStates on one hand and the Euro area on the other. This is reflected in IMF andOECD forecasts. Growth in emerging market and developing economies is forecastto reach 5.3 percent in 2013 and 5.7 percent in 2014. Growth in the United States isforecast to be 1.9 percent in 2013 and 3.0 percent in 2014. However, when comparedwith OECD estimates, the United States was seen driving global growth with theworld’s biggest economy projected to expand 1.9 percent this year (same as IMF)and then accelerating to 2.8 percent in 2014 (slightly different from IMF), whichwould be the country’s best rate since 2005. In contrast, growth in the Euro area isforecast to be –0.3 percent in 2013 and 1.1 percent in 2014. The forecast for negativegrowth in the Euro area reflects not only weakness in the periphery but also someweakness in the core. When compared with OECD estimates, the Euro zone wasestimated to remain in recession for a second year. The OECD sees its economycontracting 0.6 percent in 2013 and then returning to growth next year with a rate of1.1 percent.
OECD outlook diverged widely within the 17-nation bloc with regionalpowerhouse Germany seen achieving growth of 0.4 percent and rebounding to a rateof 1.9 percent in 2014. According to IMF, Germany’s growth is strengthening but isstill forecast to be less than 1 percent in 2013. France’s growth is forecast to benegative in 2013, reflecting a combination of fiscal consolidation, poor exportperformance, and low confidence. This may call into question the ability of the coreto help the periphery, if and when needed. Most euro area periphery countries, notablyItaly and Spain, are expected to have substantial contractions in 2013. The processof internal devaluation is slowly taking place, and most of these countries are slowlybecoming more competitive. Japan is forging a path of its own. After many years ofdeflation, and little or no growth, the new government has announced a new policy,based on aggressive quantitative easing, a positive inflation target, fiscal stimulus,and structural reforms. This policy will boost growth in the short term, and this isreflected in IMF forecast of 1.6 percent growth for 2013.2
This Article analyses the global economic recovery and examines the casefor developing countries in general and for India, in particular. Later, the article alsotouches upon the implications of this resurgence on some specific sectors such asinfrastructure. It also discusses how “competition” can be an important “policy ally”in strengthening the economic resurgence.
8.4 Global Economic Resurgence :Hopes for Developing Economies
Table 2 : Overview of the World Economic Outlook Projections(Percent change unless noted otherwise)
Resurgence in Developing Economies
According to IMF, in developing countries, GDP is expected to be firmsomewhat. Less volatile external conditions, a recovery of capital flows to levels thatsupport growth, the relaxation of capacity constraints in some middle-income
Dhanendra Kumar 8.5
countries, and stronger growth in high-income countries are expected to yield agradual acceleration of developing-country growth to 5.1 percent this year, and to 5.6and 5.7 percent in 2014 and 2015, respectively.
The overall acceleration is not stronger because the majority of developingcountries have more-or-less fully recovered from the 2008 financial crisis. For manyof these countries, current and projected growth is broadly in line with underlyingpotential growth—leaving little room for acceleration. Thus, GDP in the East Asia &Pacific region is projected to increase 7.3 percent in 2013, but then expand at abroadly stable 7½ percent rate in each of 2014, and 2015. In Latin America, growthis expected to pick up in 2013 to about 3.3 percent, but then to stabilize at justbelow 4 percent in each of 2014 and 2015. Already, growth in several countries inboth regions is being held back by supply-side constraints that are manifestingthemselves in inflation, asset-price bubbles, and deteriorating current accountbalances.
Growth in the Middle East & North Africa has been disrupted by political andsocial tensions and Euro Area weakness. Assuming that tensions in the regiongradually ease, growth is projected to slowly strengthen from 2.5 percent in 2013 to3.5 percent in 2014 and 4.2 percent in 2015.Many countries in Sub-Saharan Africaare also running at, close to, or above potential output, and risk building up inflationarypressures. Growth in the region is projected to firm over the projection period to 4.9,5.2, and 5.4 percent in 2013, 2014, and 2015, respectively. Growth in South Asia isprojected to pick up to 5.2 percent this year, following a very weak 2012 and then tofirm only gradually to 6.0 and 6.4 percent in 2014 and 2015 as spare capacity isreabsorbed. But many countries in developing Europe have still not recovered fromthe crisis. Unemployment and spare capacity remain high, because activity hasbeen weighed down by banking-sector, household, and fiscal restructuring (muchlike high-income Europe).
The East Asia & Pacific region led the rebound in global economic activityduring the fourth quarter of 2012. The landscape for trade and industrial production ischanging, however, reflecting China’s rebalancing efforts, the yen depreciation, lowercommodity prices, capacity constraints (in Indonesia, Malaysia, the Philippines,and Thailand), and a gradual tightening of macroeconomic policies. These factorshave combined to reverse earlier output gains in China, Indonesia, Malaysia, Thailand,and Vietnam contributing to easing of industrial production growth from double digitrates to just 6 percent annualized pace during the first quarter of 2013. Growth ratesof both exports and imports are also moderating but regional trade continues toexpand at double-digit rates. Industrial activity in the Philippines, which relied lesson domestic stimulus measures, continues to expand by a double-digit rate in early2013, partly because of the country’s strong trade linkages to a rebounding Japan. Arelatively loose policy stance in the region, excluding China, during 2012 hascontributed to a buildup of debt and has fuelled goods and asset price inflation.Output in the developing Europe & Central Asia region also improved considerably,
8.6 Global Economic Resurgence :Hopes for Developing Economies
growing at a 2.4 percent annualized pace in the three months ending March 2013.With the exceptions of Ukraine and Latvia, all countries had positive industrialproduction growth, and the rebound was particularly strong in Serbia. The US Dollarvalue of imports also accelerated during the first quarter, suggesting firming of domesticdemand. However, US dollar value of regional exports have slowed with weak growthin Russia and Latvia, despite the strong import demand from developing countriesand strengthening import demand from high-income Europe. Inflation has easedslightly since food price hikes and administrative tariffs caused it to gain momentumin the second half of 2012.
Economic activity in Latin American & the Caribbean softened in the firstquarter of 2013, with industrial production remaining relatively flat, after a slightcontraction in the fourth quarter. Slower domestic consumption in conjunction withweak external demand caused economic activity to slow in many countries in theregion, with annualized quarterly growth easing in Brazil, Mexico, Chile, andcontracting in Venezuela. As elsewhere, regional import demand bounced back in2012 Q4 but has eased to a more sustainable pace of 8.7 percent annualized pacein 2013 Q1. Meanwhile, lower commodity prices contributed to significant declinesin export revenues. Despite slower growth than during the pre-crisis period, severalcountries in the region continue to struggle with high and even rising inflation,suggesting structural bottlenecks. Price controls in Argentina have partially containedinflation but could lead to shortages of certain goods, while in Venezuela the recentcurrency devaluation has exacerbated local price pressures. In Brazil, inflationcontinues to surprise on the upside on higher food and service prices.
Economic outturns in the Middle East & North Africa continue to be dominatedby political and social developments. Among oil exporters, hydrocarbon outputresumed its downward trend in the second half of 2012 as the boost from Libyan oilproduction to pre-war levels faded. Output among oil importers rebounded at anannualized 10.4 percent pace in Q1, reflecting a recovery in Egypt from sharp declinesin 2012, but momentum has slowed reflecting rising political tensions in Egypt andTunisia, spillovers from the Syrian conflict to Jordan and Lebanon, and weak externaldemand that have dampened activity among oil importers. With the exception of Iraqand Morocco, inflation remains persistently high across the region, rising over 40percent in Iran because of a tightening of international sanctions. But there has beena slight easing in some economies as global food prices have moderated. Decliningforeign exchange reserves, widening external and fiscal financing gaps posechallenges to macroeconomic stability and management in the region. Aid from thewealthier economies in the region has helped bridge financing gaps in Egypt, Jordan,Morocco, and Tunisia.
Economic activity in South Asia picked up in the second half of 2012,supported by strengthening external demand and fiscal and policy reforms. By thefirst quarter of 2013, industrial production was rising at different paces in Bangladesh,India, and Pakistan, while in Sri Lanka, it stabilized in 2012 Q4. After slowing sharply
Dhanendra Kumar 8.7
in 2012, regional export volume growth accelerated to a 15.7 percent annualizedpace in the three months ending in April 2013. Year-on-year inflation rates aremoderating across the region, helped in part by an easing of international commodityprices. As inflation moderated, monetary policy eased in Pakistan (in late 2012), inBangladesh and India (in the first half of 2013), and in Sri Lanka (2012 H2 and 2013H1) to support growth. However, inflation momentum remains strong, particularly inBangladesh and India, mainly reflecting supply-side constraints and entrenchedinflationary expectations.
Exports from Sub-Saharan Africa were not exempt from the decline in globaltrade during 2012 (the exception being agricultural exporters whose trade held upduring the second half of the year). Industrial production slowed sharply in the secondhalf of 2012 among oil exporting economies (Angola, Gabon, and Nigeria), partlybecause of domestic challenges in Nigeria. Similarly, labour unrest was partlyresponsible for the flat growth in South Africa’s industrial production in 2012 Q2 andQ3. South Africa GDP rebounded to 2.1 percent annualized pace in 2012 Q4, beforeslumping once again in Q1 2013 to 0.9 percent – q/q Seasonally Adjusted AnnualRate (SAAR). Although more recent data for the rest of the region is not availablefrom World Bank, a similar mixed result is expected, with stronger global industrialproduction supporting growth in some, but weaker commodity prices cutting intoincomes in others. Earlier policy tightening (particularly in East Africa) and improvedharvests in 2012 have contributed to slow regional inflation, with prices rising at a 6.8percent annualized pace during the first quarter. Rwanda took advantage of low interestrates and investor appetite for higher-yielding assets to issue its inaugural Eurobondin April 2013, while other countries in the region (including Ghana, Kenya, and Nigeria)have plans to follow suit. 3
Fig. 1 : Regionally, Output Shows Signs of Slowing inEast Asia & Pacific, and Stability or Strengthening elsewhere
Source : World Bank.
8.8 Global Economic Resurgence :Hopes for Developing Economies
Imports and Exports
After contracting for several months, global trade is expanding once again,with the total volume of exports and imports rising at a 5.0 percent annualized pacein the first quarter of 2013. The upturn in trade was driven by developing countryimports, which rose at an 18.0 percent annualized pace in 2013 Q1. This helped stira 2.9 percent annualized increase in high-income country exports in 2012 Q4 (Figure2).
The pick-up in import demand among developing countries was broadly-based, with import volumes rising in East Asia & Pacific, Latin America & theCaribbean, and South Asia. Data for the Middle East lag and, as of February 2013,do not show signs of acceleration. The pick-up in global demand, including in high-income countries, is also supporting faster export growth in developing countries.Developing countries exports were expanding at a 15.5 percent annualized paceduring the first quarter of 2013.
Most recently, there are signs of an easing in the pace of global trade.Developing-country import demand slowed to an annualized pace of 10.8 percent inApril, and both export (-5.4 percent) and import demand (-3.6 percent) from high-income countries turned negative in April. Also, China’s economic growth appears tobe losing momentum as export growth slowed from 12.7 percent (y/y) in April to onepercent (y/y) in May - its slowest expansion in 15 months. With China being animportant trading partner in many developing countries, weaker growth there willweigh down on the imports of other developing countries.
Fig. 2 : Developing Countries Imports have led to Rebound in Trade
Source : World Bank; Datastream; Haver.
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In South Asia where India dominates trade activity, the replenishing of de-pleted stocks and earlier monetary policy easing, contributed to the robust expan-sion in South Asia’s imports. However, India’s export growth has not kept pace withits import demand, thus contributing to a growing trade balance and current accountdeficit.
Fig. 3 : Share of Indian Exports
Source : World Bank.
Opportunities for Further Growth
Overall, developing-country GDP is expected to firm somewhat in 2013,growing by 5.1 percent and gradually rising to 5.6 percent in 2014 and 5.7 percent in2015. That aggregate story, however, hides considerable regional and country-levelvariation (Figure 4). At least four classes of developing countries can be identified:
1. Countries (including many in East Asia and Sub-Saharan Africa) thatare growing rapidly and already close to or above potential, and thereforeat risk of overheating;
2. Countries that appear to be running up against capacity constraints atgrowth rates well below the growth rates of the pre-crisis period, includingseveral large and economically important middle-income countries;
3. Countries with considerable slack in their economies, whether becauseof the severity of the post-crisis downturn (developing Europe), or becauseof social and political disruptions to economic activity (Middle East &North Africa); and finally,
4. Developing countries where recovery from the crisis appears complete,and there are no outward signs of overheating—this is the largest groupof the four.
8.10 Global Economic Resurgence :Hopes for Developing Economies
The regional explanation is as follows:
Growth in the East Asia & the Pacific region slowed to 7.5 percent in 2012largely due to weakening of growth in China (relative to the recent path). The regionalgrowth is projected to slow further to 7.3 percent in 2013 with still weak 7.7 percentgrowth in China and easing of growth in the region excluding China from 6.2 percentin 2012 to 5.7 reflecting weak global demand and domestic policy tightening. Theregional growth is projected to pick up to 7.5 percent in 2014 and 2015 as China’sgrowth firms up and growth in the region excluding China accelerates to 5.9 percentin 2014 and then 6 percent in 2015 supported by strengthening global trade flows.The main risks to the region are internal, associated with a sharp reduction in Chineseinvestment, quantitative easing in Japan and rapidly rising debt and asset pricespose risks for Indonesia, Malaysia, Thailand and the Philippines. Efforts to enhanceproductivity gains through market reforms should deepen, especially in Cambodia,the Lao PDR, Myanmar, and Vietnam, while building buffers against future shocksremains a policy priority in Lao PDR, and small Pacific islands.
GDP growth in Europe & Central Asia is estimated to have sharply slowedto 2.7 percent in 2012 from 5.6 percent in 2011 as the region faced significantheadwinds including weak external demand, deleveraging by European banks, apoor harvest, and inflationary pressures. While GDP growth in 2013 in the region willbe supported by improved agricultural performance and reduced deleveragingpressures, the rebound will nevertheless be constrained by the weak carryover growthcaused by low economic activity in 2012 Q4; ongoing fiscal adjustments by theregion’s economies, and high unemployment. The recovery in export demand isexpected to be gradual. The region’s growth is expected to reach 2.8 percent in 2013and 4.2 percent by 2015. Medium-term prospects for the region will critically dependon progress in addressing structural constraints to economic growth includingcapacity constraints, high unemployment, and lack of competitiveness.
Growth in Latin America & the Caribbean is expected to strengthen to3.3 percent in 2013, from 3.0 percent in 2012, supported by stronger demanddomestically and globally. Growth should converge toward potential after very weakgrowth in 2012 in Brazil (0.9 percent) and Argentina (1.9 percent). Growth in mostother countries is expected to ease slightly or decelerate this year. Growth is expectedto decelerate markedly in Venezuela (to 1.4 percent), as highly expansionary policiesare reversed. Over the medium term, the regional economy is expected to grow justunder 4 percent annually, supported by stronger capital flows (notably FDI), recoveringexternal demand, and structural reforms in some of the larger economies. Suchimprovements will be essential if the region is to sustain stronger growth over themedium term in the context of slow growth among major trading partners. Risksfacing the region include the possibility of overheating in some of the faster-growingeconomies and the potential impacts of even weaker-than-projected commodity prices.
Growth in the Middle East & North Africa region is projected to slow downto 2.5 percent in 2013, from 3.5 percent in 2012, reflecting a second year of recession
Dhanendra Kumar 8.11
in Iran, subdued growth in Egypt, and a modest pickup in Algeria. Political tensionsremain high in advance of scheduled elections and referendums, and security risksare dragging down activity and investment. In the wake of lower private capital inflowssince 2010, fiscal and external account imbalances among oil importers areincreasing, in turn exacerbating funding pressures and undermining fiscal sustainabilityparticularly in Egypt. However, a gradual strengthening of demand in key Euro Areatrading partners and the moderation in global food prices could provide some respitein the near term. Among oil exporters, surging government spending has increasedvulnerability to a sustained fall in oil prices. Medium-term prospects hinge on theresolution of political tensions and security risks, and on the implementation ofreforms to place the region’s economies on a more sustainable footing and to boostinvestment, jobs, and growth.
GDP growth in South Asia slipped to 4.8 percent in 2012, mainly reflectinga continued deceleration in India, and slower growth in Sri Lanka and Bangladesh.Growth in Pakistan and Nepal remains sluggish, below regional peers. RegionalGDP growth is projected to pick up to 5.2 percent in 2013, before accelerating to 6.1percent and 6.4 percent in 2014 and 2015, in line with strengthening external demand,normal monsoons (after poor rains in 2012), and a gradual pickup in investmentspending. Continued progress in fiscal consolidation and implementation of reformsthat reduce structural constraints and lower inflationary expectations will determinethe pace of recovery. Domestic risks that have gained in importance include a possiblederailing of reforms, a resurgence of inflation, and weaker-than-expected monsoonrains.
Growth in Sub-Saharan Africa has remained robust at an estimated 4.4percent in 2012 (5.4 percent if South Africa is excluded), supported by resilientdomestic demand and still relatively high commodity prices. Strengthening externaland resilient domestic demand, an accommodative policy environment, increasinginvestment, still high commodity prices, and increased export volumes in countrieswith new mineral discoveries (Sierra Leone, Niger, and Mozambique) are expectedto underpin a return to the region‘s pre-crisis growth rate of around 5.2 percent overthe forecast horizon (2013–15). Nonetheless, risks remain tilted to the downside. Aweaker-than-expected recovery in high-income countries and sharper-than-expecteddecline in commodity prices will slow growth in the region and lead to deterioration infiscal and current account balances, which remain strained in a number of economiesin the region. Other domestic risks include overheating in economies operating closeto capacity, adverse weather conditions, and political instability.
FDI inflows to developing countries are projected to increase through theforecast period, reaching $758 billion (2.4 percent of GDP) by 2015. Despiteconsiderable real-side uncertainties in the short term, multinational corporationscontinue to be attracted to developing countries’ medium-term growth prospects,large and growing consumer base, natural resources, and still low labour costs. Inaddition, many developing countries are removing barriers to foreign investment.
8.12 Global Economic Resurgence :Hopes for Developing Economies
Fig. 4: Acceleration Muted in Certain Regions
Source : World Bank.
The Case of India
India is at the forefront of any discussion on Global economy. There is a lotof debate going on “whether a magic growth rate of 9% can be achieved again assecured by India during 2003-04 and 2007-08” or “Has India lost the advantage it hadearned at some point in recent past” or “Whether China has moved ahead of India” or“Have India pleased or disappointed the experts’ opinion”. Irrespective of the natureof conversation, it is an established fact that, Experts may choose to love or hateIndia’s economic progress, but they can’t ignore it.
As we gather from most of the discussions, there is a greater opportunity forIndia to restore the trust by sticking to its policy announcements and maintain thepace of economic reforms. This will not only stabilize the market but also establishIndia as an economy, which can be relied on “Face Value” of its policy makers. Let’stake the case of policy announcement on “FDI in multi brand retail” which wasannounced and then reviewed /withdrawn. In either situation, market reacted andexpectations changed.
Prior to crisis it was primarily an export-led growth. However, growth afterthe crisis was mostly restored, by loosening the monetary policy and stepping uppublic expenditure, before it turned distinctively adverse by 2012-13.
According to IMF report, Growth of India will rise to 5¾ percent in 2013 as aresult of improved external demand and recently implemented pro-growth measures.Significant structural challenges will likely lower potential output over the mediumterm and also keep inflation elevated by regional standards. In Asia, growth hasalready returned to a healthy pace in China. External demand, solid consumption, abetter monsoon season, and policy improvements are expected to lift activity inIndia.
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Over two decades, India has implemented wide-ranging reforms that openedup the economy, dismantled the old licensing system and introduced competitioninto a number of sectors that had previously been dominated by public monopolies.This decisive action has helped the Indian economy to narrow the gap in living standardswith advanced economies. Supported by further reforms, convergence acceleratedin the 2000s as growth averaged over 8% a year, one of the strongest performancesin the world.
The biggest reason for economic slowdown is a vicious cycle involving highCurrent Account Deficit (CAD), investment stimulus still weak, diffident sentimentsdue to governance issues, regulatory delays, judicial activism and extreme riskaversion among bankers and financial markets. This slowdown is only partly cyclicaland reflects the emergence of energy, infrastructure, human capital and institutionalbottlenecks. The rapid economic growth in the last two decades has indeedaccentuated the demand for energy and natural resources, for transport infrastructureand skills. But supply of these key engines of growth has not been able to keeppace. Institutions and public as well as private governance also need to adapt to thedevelopment of India and the progressive transformation of its economy.
Fig. 5 : GDP Growth
Source : World Bank.
Despite important economic reforms since the early 1990s, India still hasan unfavorable regulatory and business environment, in particular for labour-intensiveactivities. Over the past few years India has introduced new policies to strengthen
8.14 Global Economic Resurgence :Hopes for Developing Economies
the environment in which businesses operate, including on competition, investorsrights, business conduct and anti bribery. If implemented and continued, these reformswould play a key role in boosting India’s growth potential by strengthening incentivesfor firms to invest, innovate, increase productivity and ultimately create more jobs inthe formal sector. They will however need to be complemented by actions in otherareas including improving the infrastructure and human capital.
Competition is regarded as the fourth corner-stone of the public policyframework, along with the monetary, fiscal and trade policies. It is widely recognizedas a powerful tool to secure efficient use of scarce resources, enhance productiveefficiency, add to the static and dynamic efficiency of the economy, maximizeeconomic growth and contribute to the welfare of the common man. Linking therelevance of competition in driving economic growth, William Lewis, in ‘The Power ofProductivity’ and economist Paul London in ‘The Competition Solution’ have concludedthat the competitive pressures have helped suppress inflation, raise living standards,and pushed manufacturing productivity up by 4% a year. Since excessive regulationof product markets is a barrier to the diffusion of technology and lowers the speed atwhich labor productivity catches up to the level of the best performing economies.Despite progress, the overall regulatory environment in India is less favorable tocompetition than the average OECD country and some non-member countries. In2011, India proposed a National Competition Policy, a key advancement towardsremoving restrictions on competition. This new proposed policy can be a bold andpotentially far-reaching economic reform tool in line with OECD Recommendationsin this area.
A world-class infrastructure is not only a prerequisite but also a foundationfor growth. India is now paying due attention to address its infrastructure requirements.As per Planning Commission estimates, India needs a massive investment of US$500 billion in 2007-12 and more than a trillion $ in 2012-17. Among infrastructure,power sector is estimated to require the maximum investment, (US$ 150 billion),followed by roads & highways (US$ 76 billion) and telecommunication and railways(US$ 65 and US$ 62 billion respectively). The urban infrastructure has been identifiedas one of the most important sectors in the recent times. To meet the growingchallenges of rapid urbanization, the Government of India under Jawaharlal NehruNational Urban Renewal Mission (JNNURM), has allocated US$ 20 billion for urbansector. Another infrastructure development project which probably is the largest inthe world is the Delhi-Mumbai Industrial Corridor (DMIC). It is being developed by theGovernment of India as a global investment and manufacturing destination supportedby world-class infrastructure and enabling policy framework. India needs to doubleits infrastructure spending to ~10% of its GDP to achieve 8 – 9%+ GDP growthwhich further requires new funding sources. Investment target in infrastructure hasbeen doubled from ` 27 lakh crores (Eleventh Plan) to ` 51 lakh crores during theTwelfth Plan period (2012-17) (~47% of investment is expected to come from theprivate sector). Major funding sources for infrastructure spending are budgetary support& debt funding. In the first 3 years of Eleventh Plan, budgetary support constituted~45% of the total infrastructure spending.
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India’s Finance Minister P. Chidambaram has said resources should bemobilized from insurance and pension sectors for infrastructure debt funds. “Forinfrastructure debt funds (IDFs), we should try to mobilize resources from insuranceand pension sectors as these funds are available for a long-term horizon” adding thatthese products were necessary to give a thrust to investment in the infrastructuresector and attain annual GDP growth of 8%.
India requires $1 trillion (around ̀ 60 lakh crore at current rates) in the 12thFive-Year Plan period for infrastructure development. Speaking after launching themaiden IDF scheme of IIFCL Mutual Fund, FM said the fund would pave the way forsetting up more such debt funds.
When it comes to environment growth, India has incorporated sustainablegrowth as a focus area in its growth strategy plan within the 12th Five-Year Plan(2012-2017) Faster, More Inclusive and Sustainable Growth. India’s priorities for greengrowth centre on providing food and energy security, including also actions onsustainable agriculture, waste management, resource efficiency and energy access,sustainable water provision, sustainable transport and green housing. The NationalAction Plan on Climate Change (NAPCC) from 2008 outlines existing policies andprograms, as well as eight “national missions” focused on the promotion of solarenergy, energy efficiency, sustainable habits, water efficiency, and the preservationof the Himalayan Ecosystem.
India has made impressive progress in reducing absolute poverty over thepast decades, but inequality is rising. In 2009-2010, 33.8% of the rural populationand 20.9% of the urban population lived below the Government’s official absolutepoverty line, down from 42% and 25.5%, respectively, in 2004-2005. This is thecontinuation of long-term trends underway since the 1970s. Economic growth hasplayed a pivotal role in poverty reduction, particularly since major economic reformswere initiated in the early 1990s. Nevertheless, while India strides towards absolutepoverty reduction, it has experienced a significant rise in inequality, similar to thatseen by other major Emerging Economies, including China, Russia and South Africa(Figure 6).
Improving the functioning of the labour market is essential to long-term growthbut also to reduction of inequalities. While the Indian economy has performed wellwhen it comes to creating jobs, informal employment accounts for approximately85% of total employment, with women slightly less likely than men to hold formaljobs. The incidence of informal employment is much higher in India than in mostother large emerging countries. Overall, the employment rate is held down by therelatively low participation rates of prime-age women (36%), youth (37%) and olderworkers (43%), which contrasts sharply with the 98% participation rate for prime-agemen. As a comparison, 86% of prime-age women are active in the labor force inChina and 70% in Brazil (Figure 7).
8.16 Global Economic Resurgence :Hopes for Developing Economies
Fig. 6 : Change in Inequality Levels
Change in inequality levels, early 1990s versus late 2000s1
Gini coefficient of household income2
1. Figures for the early 1990s generally refer to 1993, whereas figures for the late 2000s generallyrefer to 2008.
2. Gini coefficients are based on equivalised incomes for OECD countries and per capita incomesfor all EEs except India and Indonesia for which per capita consumption was used.
Source : OECD (2011), Divided We Stand : Why Inequality Keeps Rising; OECD-EU Database onEmerging Economies and World Bank Development Indicators Database.
Fig. 7: Employment by Gender
Informal work is selected G-20 economiesPersons in informal employment1, gender, as a percentage of non-agricultural employment
Note : Countries shown in ascending order of the proportion of women in informal employment.1. Data for the Russian Federation correspond only to persons employed in the informal sector.
Source : ILO/WIEGO Informal Employment Database.
Dhanendra Kumar 8.17
Conclusion
Overall, the global economy seems to be moving into a new and less volatilephase. The extreme risks and swings in perceptions that have driven global capitaland output markets have eased significantly, even as new risks and challenges havegained in prominence.
The majority of developing countries have navigated the crisis and immediatepost-crisis period very well. With the exception of some countries in developingEurope and the Middle East & North Africa, they recovered relatively quickly from thecrisis and have enjoyed solid, if less rapid than boom period, growth rates. With thedemand gaps opened up by the crisis largely filled, future growth will increasingly bedetermined by the success with which countries succeed in addressing supply-sidebottlenecks, including gaps in physical, social, and regulatory infrastructure:
1. In many countries, policy attention is appropriately returning to simplifyingregulations, opening up to trade and foreign investment, investing ininfrastructure and human capital. These are the policies that haveunderpinned the acceleration in developing country growth over the past20 years, and it is only through continued reform and progress in thesepolicies that the strong productivity growth of the past 20 years can bemaintained.
2. For the many countries operating at close to or even above full capacity,macroeconomic policy may need to be tightened—both to re-establishfiscal space that was used up in response to the crisis and to preventinflationary pressures and asset bubbles from building up.
The external risks facing developing countries have also evolved:
1. The recent decline in industrial commodity prices is, perhaps, signalingan end to the upward phase of the commodity cycle. Policy makers incommodity-exporting countries need to take a close look at the potentialconsequences of a sharper-than-anticipated decline in commodity pricesfor growth, government finances, and their external financing needs.
2. For countries in East Asia, the recent intensification of monetary easingin Japan could prompt strong and disruptive capital inflows, adding toalready existing inflation and currency pressures.
3. Longer term, as high-income monetary policy becomes lessaccommodative, interest rates in developing countries will rise. Higherrates may generate difficult adjustments and possibly domestic crises,especially in countries where public and private sector indebtednesshas been on the upswing.
4. Over the longer term, higher interest rates will translate into increasedcapital costs, potentially slowing developing-country growth by as muchas 0.6 percentage points per annum after three years as firms reducedebt levels to more manageable levels.
The global economic resurgence has important implications for India. Itbecomes all the more important in the wake of positive developments on the fiscal
8.18 Global Economic Resurgence :Hopes for Developing Economies
deficit front. Notably, Central Government’s fiscal deficit fell to 4.9 percent of GDP inthe 2012 fiscal year, below the 5.2 percent initially estimated. The Government haspledged to further reduce it to 4.8 percent in FY 2013 and 4.2 percent in FY 2014.After the recent consolidation, India’s general government deficit (including stategovernment fiscal deficits) is around 7 percent of GDP.
The sharp economic slowdown experienced in the post-financial crisis periodbrought out the structural shortfall areas and has made the task of reviving growth ina sustainable manner urgent.
World Bank has a stable growth outlook for India, which is encouraging,though capital flows, which have helped significantly to steady our external account,will be under pressure and since our current account deficit will improve only marginallybased on movements in crude oil price, the rupee would continue to be under pressurebased on fundamentals.
Given that India requires $1 trillion (about ̀ 60 lakh crore at current rates) inthe 12th Five-Year Plan period for infrastructure development, this economic resurgenceneeds to be optimally utilized through right policy initiatives to encourage greaterflow of funds to the needed sectors of the Indian economy.
Over the past few years India has introduced new policies to strengthen theenvironment in which businesses operate, including on competition laws, investorsrights, business conduct and anti bribery. On the positive side, there are a number offactors – huge and expanding market, burgeoning middle class, favorable demographicdividend, enviable record of uninterrupted strong democratic conditions and a fabricof world-class mighty institutions for the rule of law. However, there still remains aperception of an unfavourable, complex or unpredictable regulatory and businessenvironment, in particular for labour-intensive activities, which needs attention.Infrastructure needs to be further improved, and indicators of health, nutrition andeducation attended to. Agriculture and rural areas need greater attention, also tosustain the long term demand curve. To boost efficiency and productivity acrosssectors, competition, which is regarded as the fourth corner-stone of the publicpolicy framework, along with the monetary, fiscal and trade policies, needs to beemployed as a policy tool to secure efficient use of scarce resources, add to thestatic and dynamic efficiency of the economy, maximize economic growth andcontribute to the welfare of the common man. It can be said with confidence, thatthough slowly, but surely, the economy is on a resurgent mode.
