Can In­dia beat this slow­down?

The Pak Banker - - OPINION - Jayan Jose Thomas

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.

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