From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : Global economic slowdown
News show signs of another economic crisis and stock market decline.
- The economic situation around the world is rather grim. From synchronized global growth in the first half of 2017, we are now in the midst of a synchronized slowdown exacerbated by the US-China trade war.
- Merval Stock Market dropped 48% in a single day and the peso has fallen by 85% over the last three years.
- Many countries in Europe have been or have now fallen into negative interest rates, with Switzerland, Denmark, Sweden, and the Eurozone all with minus signs on interest rates.
- Countries that account for almost a quarter of total global output now have central banks with policy rates set below zero.
- The amount of “sub-zero” debt, that is debt with negative interest rates, is at an all-time high of $15 trillion.
- Europe’s slowdown is fully demonstrated by the entire German yield curve going below zero last month.
- The US economy has lost steam. Real growth is tapering towards 2% on an annualized basis. US consumer sentiment is still there because of low unemployment despite businesses being much more cautious about exports and capital expenditure.
What is the issue
- Large parts of the world are starting from negative interest rates.
- This means that monetary policy stimulus as a method to combat the slowdown is rendered largely ineffective, and central banks in Europe, Japan, and the US may have to once again increase the size of their balance sheets.
- The only other choice is to use fiscal expansion to counter the slowdown.
- A third choice is to take the impact of the slowdown without too much of a cushion, but democracies are ill-equipped to deal with the negative political reaction to prolonged recessions.
- For emerging markets affected by the taper tantrum and now by this synchronized slowdown, it is not good news.
- Despite significant variations in global growth, oil prices have ranged between $50 and $70 a barrel over the last few years. So, the pressure on India’s balance of payment (BoP) has stayed.
- China weakened its currency to combat the trade war, and India is left with little choice than to weaken the rupee in step.
- A weakening rupee would reduce India’s flexibility to dramatically decrease interest rates.
- India must use any window of opportunity to undertake any structural reforms that present themselves.
- Low oil prices, good global growth, and moderate inflation are such windows.
- India’s medium-term economic growth be supported by favorable demographics.
- In the short-term government may not undertake deep structural reforms that may impact growth and employment.
- A clever cocktail of a stimulus and structural reforms is needed.
- The stimulus should take the form of government infrastructure investment and incentivization of the private sector to invest funds.
- Reforms must focus on factor markets and on the ease of conducting business.