Can India beat this slowdown?
THE world economy is so hard to predict. In 2008, as the global financial marketsplunged into a crisis, high oil prices were considered to be one of the factors that caused it. Today, many fear that the world economy is on the edge of another recession. Guess what is high up there on the list of its contributing reasons: low oil prices. The price of crude oil remained mostly above $100 per barrel for almost three years from 2011 onwards, but declined sharply during the second half of 2014, settling at around $50 per barrel for a good part of 2015. Stock market prices collapsed in many parts of the world in January this year when oil prices fell to even greater depths, touching below $30. One of the reasons for declining oil prices is the advance made over the last few years with respect to oil production, especially in the U.S. The recent lifting of sanctions against Iran has eased the supply situation even further. But the falling oil prices are also a reflection of the stagnation in worldwide demand, and this is what has made the stock markets panicky. China's economy is projected to grow at 6.3 per cent in 2016, its slowest growth in 25 years. A slowing China has far less appetite for oil and other commodities. This has adversely affected a number of emerging economies, which are suppliers of commodities or are closely linked to the Chinese production networks. Russia and Brazil, both major commodity-exporters, registered negative rates of growth of gross domestic product (GDP) in 2015.
The good news, and the bad news Amid all such mayhem, India's economy appears to stand tall. Its projected growth for 2015-16, at 7.3 per cent, makes it the fastest-growing large economy in the world, according to the International Monetary Fund (IMF). India is a large importer of oil, and therefore falling oil prices have been beneficial to its economic growth. India's oil imports as a proportion of its GDP have come down from around 9 per cent during 2011-14 to less than 5 per cent now. With the fall in oil prices, inflation based on the wholesale price index (WPI) has been in the negative territory in the country since November 2014. However, the picture of growth and stability presented by the above-quoted figures is misleading. To begin with, it is important to note that scholars have raised questions on the recent GDP growth figures, which are based on a new methodology employed by the country's statistical agencies in estimating national income.
More important are the wide variations in growth across sectors. Monsoons have been deficient in the country for the second consecutive year, with a disastrous impact on agricultural production and rural demand. The performance of the manufacturing sector has been unimpressive. Micro-and small-industrial units in particular have been facing a crisis over the last several years. Year-on-year growth of India's exports has been negative for 12 consecutive months in a row. There has been a surge in manufactured imports into India in recent years. Imports from China have increased markedly following the slowdown in that country's economy. It is only due to the high rates of growth in the services sector that India's overall economic growth appears robust. Given its nature as described above, it is not surprising that India's economic growth has had a poor record with respect to employment generation. This author has made certain estimates on employment growth in India between 2004-05 and 2011-12, a period of exceptionally fast economic growth for the country. They show that, given the growth in the working-age population, the workforce engaged in industry and services in India could have potentially increased at the rate of 15 million a year during those years. But the actual increase that occurred was at a far slower rate: only around seven million jobs annually. Government as a demand-driver The growth of aggregate demand in an economy is derived from four sources: private consumption, private investment, government expenditure and net exports.