Not India Alone, It’s The Global Economy That Is Slowing Down
Even the West isn’t faring well. If it is Trump’s ‘Make America Great Again’ in the US, it’s Brexit in Europe that has led to a slowdown in the economy. Inflation in the Eurozone has remained below the 2 percent target and manufacturing sector is subdued. Analysts expect the European Central Bank to cut rates in near future in order to provide stimulus to the economy. The uncertainty over how Britain will leave the EU and weak demand are all contributing to what the central bank has recognized as slowdown.
What do detractors resort to when they fail to corner the ruling dispensation on real issues? More often than not, they shrewdly rally behind an element that appears negative when seen in isolation. Take for example country’s GDP growth rate of 5 percent in the first quarter of FY2020 that is being cited by critics to counter the growth story of Modi-led government. True, the economy has slowed, India is no longer the world’s fastest growing major economy and consumption has been hit. The critics of the government have found sizeable ammo in these figures and the faction that had turned silent after the flop Rafale scam dramatics has turned noisy again. Indeed, numbers cannot be denied. But at the same time, we must also trace underlying facts of this slowdown; is this failure of the government or an outcome of factors beyond the control of policymakers?
The Federal Reserve – central banking system of the United States that decides the monetary policy – has cut policy rates in July this year for the first time in ten years. Experts have cited various reasons behind the move. The biggest is the slowing global economy that has been hit badly by trade disputes due to protectionist and inward-looking stance of many governments across the world. The United States under President Trump has waged an unparalleled trade war against world’s second largest economy, China. Tariffs have been hiked by both the belligerents on each other’s goods and talks to find a solution haven’t produced any positive outcomes yet. Analysts are expecting another 100 basis points rate cut by the Fed to keep the economic activity from crashing and economists are foreseeing a ‘mild recession’ in the United States.
Although we Indians near-unanimously hate Chinese communist ideology and its forced political and economic hegemony through predatory loans, China’s remarkable economic growth story has been a subject of academic research. Detractors of the Indian government and its policies have deliberately overlooked recent news headlines stating that China’s GDP growth has logged figures that stand at a 27-year low. Yes, in its April-June quarter in FY2020, China’s GDP grew by 6.2 percent, weakest in almost three decades. The communist party-led country has announced cuts in banks’ reserve requirement ratios and substantial tax cuts in order to provide stimulus amid trade war with the US that has severely hurt exports. Of late, most economists have cut growth forecast for China to below 6 percent owing to multiple factors. The ‘great China growth story’ has been dealt a body blow.
Let’s talk about Japan, world’s third largest economy. The Governor of the central bank there has committed to ‘act pre-emptively’ given the unabated global trade war that has dented the prospects of economic recovery of Japan. In Japan, the policy rates are already at ultra-low levels and both the GDP growth rate and inflation growth have been missing targets. Japan’s economy, has been hit by the wave of protectionism and the US-China trade dispute has adversely impacted Japanese exports. As if that were not enough, Japan waged a trade war against South Korea and imposed restrictions on Japanese exports to South Korea alleging that the latter has been assisting North Korea in its nuclear program. As a retaliatory move, many South Koreans have shunned Japanese products and the trade dispute between Asia’s two powerful export-led economies is set to have wide repercussions.
Even the West isn’t faring well. If it is Trump’s ‘Make America Great Again’ in the US, it’s Brexit in Europe that has led to a slowdown in the economy. Inflation in the Eurozone has remained below the 2 percent target and manufacturing sector is subdued. Analysts expect the European Central Bank to cut rates in near future in order to provide stimulus to the economy. The uncertainty over how Britain will leave the EU and weak demand are all contributing to what the central bank has recognized as slowdown. In Canada, another major economy, Trump’s negative stance over North American Free Trade Agreement (NAFTA), combined with hiked tariffs has turned policymakers conscious. Mexico is also staring at increased tariffs on its exports to the US and has given in on Trump’s demand to halting the flow of refugees into the US from the US-Mexico border.
In the West Asia, Saudi Arabia has already announced its shift from crude oil-led economy in view of price pressures on oil and Iran is reeling under US sanctions over its nuclear program. It is notable that although OPEC has repeatedly resorted to production cuts (with Russia agreeing to cuts) in order to prevent any steep fall in crude prices and Iranian crude is already out of international market due to sanctions, crude prices haven’t shot up. The cause is slowdown in the global economy that has led to reduced use of oil by industries across the world, particularly emerging economies like India and China. It is for a reason that the world is witnessing an unprecedented wave of refugees fleeing their devastated economies and finding safe haven in better-off countries. Consumption all over has been hit and the slowdown that has followed is impacting all, not a select few.
In this light, we are to see India as a shining spot. The government has adopted a reformist stance and without caring for political fallouts is relentlessly pursuing socio-economic policy actions. Yes, state revenues have not been as high as they were expected, but one must expect that a policy change like the GST will take some time before it settles and yields outcomes. Lately, GST revenues have seen an uptick and increase in the number of taxpayers is set to generate more income, thereby enabling the government to spend more on infrastructure and welfare schemes. The Finance Ministry is not in a denial mode to the present situation and measures have been taken to infuse confidence in investors and spur economic activity. Indians overwhelmingly placed their trust in the Modi-led government and it is time the detractors shed their false narrative and stop any fear-mongering over the economic health of the country.
By Dr. Sunil Gupta
(The author is a Chartered Accountant)