DO YOU ATTRIBUTE OUR ECONOMIC DISTRESS MAINLY TO GLOBAL HEADWINDS OR HAVE DOMESTIC POLICIES HAD A ROLE?
PRONAB SEN IGC
Global developments have unquestionably precipitated the problem, but the conditions that have led to our present state of vulnerability are the outcome of our past policies. Unfortunately, the discourse has focused excessively on oil price increases and flight of portfolio capital with resulting stress on the current account deficit and the exchange rate. The real threat comes from the fact that our recent growth has been largely urban and organised sectorled. The rural and informal sectors have languished. Farmers’ agitations are a symptom of this. This skewed pattern seems to have led to distributional changes that make us far more dependent on imports and external financing. This pattern is almost entirely domestic policy-driven.
N.R. BHANUMURTHY NIPFP
After a stable external environment for the past three years, there are global headwinds that emerging markets such as India are facing—international oil prices, unwinding of quantitative easing, protectionist policies, etc. are posing downside risks to the Indian economy. However, some domestic policies too are exacerbating the risks. One of the most important ones, apart from NPAs and banking issues, is the misguided fiscal consolidation policy of the government. Conveniently, it has adopted the fiscal deficit target of the FRBM (Fiscal Responsibility and Budget Management) while ignoring the sub-target of reducing revenue deficits. Hence, the current policy that leads to compression of public capital expenditure would not be expansionary but at the same time could be inflationary. Given the global headwinds, any macro framework would suggest that one should compromise on growth targets if one has to contain the twin deficits. But what we see is contrary—targeting higher growth than specified in the 2018-19 Union budget. This could widen both the CAD and fiscal deficit to unsustainable levels or they affect future growth. However, there are other policy measures such as building of rural infrastructure and various reform measures that could mitigate the risks emanating from the global economy.
MAITREESH GHATAK LSE
Global headwinds are part of the game. The current government also benefitted from falling oil prices till recently. Crude oil prices hit a record of $160 a barrel in 2008, with the average price being $93 per barrel in the UPA II years and the corresponding figure being $53 during the Modi years. I think the government in its zeal for the so-called war on corruption took its eyes off progrowth reforms or pro-poor welfare policies. The biggest casualty has been investment. Another way to see why domestic policies played a role in the economic slowdown is to compare India’s growth rate with the world growth rate. If we take the difference between India’s growth rate and the average growth rate in the world, the margin was 4.48 percentage points under the current government, which is good but if we compare it with the previous government, it was 5.26 percentage points under UPA II, even taking into account the so-called policy paralysis in its last two years.
R. NAGARAJ IGIDR
Both. Rising global interest rates and oil price increases are the principal international reasons affecting India’s economic outlook. Trump’s trade war is causing considerable uncertainty in global trade, affecting India as well. Domestic problems in financial firms like the IL&FS group’s defaults on loan repayments and corporate governance issues with the ICICI Bank a few months ago have also contributed to the fragility in the financial markets. The government’s action appears far too little and hesitant.
D.K. JOSHI Crisil
The stress in the economy is both due to global and domestic factors. The rise in the nonperforming assets of public sector banks can be traced to domestic factors such as aggressive bidding and overinvestment in sectors such as infrastructure, falling metal prices and also the regulatory push to recognise the weak assets in the banking system with an objective to clean up the system.
Global headwinds are largely responsible for rising external vulnerability and the weakening of currency. The shocks are now much bigger in quantum and complexity. As India imports over 80 per cent of its crude oil requirement, a sharp pick-up in oil prices has bloated the current account deficit and made India more vulnerable to a global risk-off scenario.