Benefiting from a confluence of factors — such as the reduced international price of energy and resilience in domestic private consumption — India has become the fastest-growing country even as the global economy has weakened. However, rising concerns about the global outlook and international policy agenda need to be carefully studied to assess their policy implications for India’s sustained growth leadership.
Relative to expectations, global growth has been underperforming in recent years. On the one hand, the cyclical nature of industrial country growth has been deeper than expected, demonstrating the depth of the financial crisis since 2008. On the other hand, it is becoming clearer that this underperformance is increasingly structural in nature, affecting emerging markets as well, and will require a global policy agenda to address the rising structural weaknesses. India must play a key role in helping to build and implement such a global agenda, as part of the process in sustaining its own growth.
Global structural weaknesses deserve to be looked at carefully. They arise from both supply-side factors and demand constraints, affecting global trade, a critical growth engine in recent decades:
- Productivity has clearly been falling in industrialised countries, and in emerging markets, leading to supply shortages. China’s slowing growth has had significant spillover effects, but the underlying structural factors likely run deeper. There is rising consensus that this reflects falling investment returns, perhaps from slowing innovation that has reduced investment. Greater research and increased competition, especially in the service sector, would help raise investment and productivity.
- The imbalances slowing growth possibly also reflect an overall demand shortfall. Why has demand slowed down? Demand was likely boosted by debt in many advanced and emerging market countries, sequentially, and capital is now at the risk of moving out of emerging markets. Additionally, many believe rising inequalities in advanced countries and key emerging markets have reduced the propensity to consume and produced what is called a “savings glut” in many countries—the counterpart of a demand-side constraint which feeds the fear of deflation.
- Thirdly, global trade has stalled far below the long-term annual average trade growth of at least 5% until the start of the financial crisis, and even more, in emerging markets—. It is not just cyclical in nature: there is evidence that trade elasticity to income has fallen, especially in the United States and China. Of course, trade liberalisation has slowed significantly with the collapse of the Doha Development Round.
India is affected by all these factors. Especially on the investment side, corporate investment remains low and higher levels of public infrastructure are needed to meet supply bottlenecks and crowd in private investment. On the demand side, inequalities have clearly increased in recent years and exports remain weak though India has been relatively protected from the factors affecting China’s reduced trade.
While each of abovementioned factors require concerted domestic policy reforms, India also needs to be fully engaged in the emerging G20-led international policy agenda being developed to deal with global structural weaknesses and raise public investment where fiscal space is available. In this context, India and many other emerging markets clearly offer higher investment returns—partly on account of their demographics—and should remain attractive to the global savings glut with their deepening international integration.
With the failure of the Doha Round to move ahead with multilateral trade liberalisation, other efforts are being proposed to revive trade. Thus far, India has not benefited as much as others like China (as it did after securing World Trade Organization (WTO) membership, from the trade booms in recent decades, but India has ratified the deal reached by the WTO on trade facilitation, which should, potentially, significantly reduce trade costs. Beyond this, a number of regional and bilateral trade agreements have been proposed, some going beyond manufacturing, to cover agriculture, investment, business, and other services where India has comparative strength. In any case, steps to raise India’s trade integration more quickly in the South Asia region would help catalyse new investment and competition.
Beyond these factors intended to revive competition and investment, there is the issue of the international monetary system and how it manages the volatility of global liquidity. Also at stake are the spillovers from domestic monetary policies, especially from the industrialised countries, and their implications for global liquidity. Coupled with renewed concerns regarding financial retrenchment in global markets, affected by ongoing regulatory reforms, they have increased financial market uncertainties.
The International Monetary Fund (IMF) is now discussing a road map for strengthening the international monetary system [1], and India needs to be part of the brainstorming behind it; how to better manage liquidity shocks and deal with external financing needs. India’s role is especially important as tomorrow’s key financial players—official and private—will come from emerging markets and their rising financial integration will impact global liquidity.
In the absence of a mechanism to better manage the volatility of global liquidity, the world will continue to be vulnerable to the sudden drying up of liquidity or of disorderly acceleration in capital flows. This risk, in particular, is now a major concern in the current international monetary situation.
Continuing in this direction is best done through a global monetary institution centered in a transformed IMF, with the mandate and instruments that would allow it to regulate global liquidity in addition to its other functions.
A move in this direction needs to be carefully sequenced, with the IMF provided with a stronger governance framework that reflects the rising role of emerging markets, a mandate for effective surveillance, stabilisation of global liquidity and exchange rates, mechanisms for reducing the risk of disorderly spillovers, and for dealing with debt restructuring. Eventually, the IMF would need to be better equipped with a monetary asset instrument to deal with changing global liquidity.
Such a transformed IMF could be charged, in cooperation with national and international central banks, with continuously monitoring global liquidity flows and taking the regulatory decisions needed to to manage the same.
Undoubtedly, it will take time to build the necessary global consensus. To achieve it, international public opinion needs to be better informed of the ongoing risks of instability inherent in the current system. In fact, in today’s climate, it is highly desirable for major stakeholders to take this initiative forward and convene a new Bretton Woods II conference to consider the necessary changes in the Articles of Agreement of the IMF.
Anoop Singh is Distinguished Fellow, Geoeconomics Studies at Gateway House: Indian Council on Global Relations.
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References
[1] International Monetary Fund, Strengthening the international monetary system—a stocktaking, March 2016, <http://www.imf.org/external/np/pp/eng/2016/022216b.pdf>