Issues related to Economic growth

[op-ed snap] An intensifying whimper that has begun to take a global toll

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Global economic slowdown

CONTEXT

News show signs of another economic crisis and stock market decline.

Background

  • 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. 

India

  • 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.

Way ahead

  • 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. 
    1. The stimulus should take the form of government infrastructure investment and incentivization of the private sector to invest funds. 
    2. Reforms must focus on factor markets and on the ease of conducting business.
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