Sunday, February 16, 2020

India and “secular dynamism”

Delivering the 8th C.D. Deshmukh Memorial Lecture, IMF first DMD David Lipton argues that the world economy is changing and is continuously facing new threats—2008 global economic upheavals, US-China trade conflict, hard Brexit, secular stagnation in advanced economies but with spillovers in other economies to, aging societies in some economies, etc. Reinvigorating global growth would require structural reforms to boost confidence and investment— from infrastructure investment to tax incentives for innovation, education and health spending, and product and labor market reforms. 

India affects global growth and is affected by global growth too. For instance, India’s sharp slowdown during the first half of FY2020 meant that global growth was also affected. India’s slowdown has most to do with weak domestic demand, falling credit and problems in the financial system. He argues that with right policies and supportive global growth, India could be a source of “secular dynamism”.

Secular stagnation in the advanced economies is caused by “lagging productivity and flagging investment opportunities”. Secular stagnation refers to long-term slowdown or no economic growth in a market-based economy. He argues that we will soon see the next phase of the IT revolution— the impact of big data, artificial intelligence and other innovations on productivity. 

Lipton states that developing countries need to attract capital and technology, but for that they need to be truly "investable". Obstacles for this include opaque and inadequate legal frameworks, corruption and governance shortcomings, and onerous regulations including import restriction. 

In India’s case, services (particularly ITC) have been the driver of productivity growth, and that the economy has the potential to exploit the demographic dividend. 

Currently, Indian economy is constrained by credit availability, financial sector bottlenecks, impaired balance sheets of corporate and finance sectors, slow export growth, and lagging agricultural sector. Unemployment has risen and labor force participation has fallen. 

India take advantage of its comparative advantage in manufacturing by deeper linkages to global value chains. 
  • Promote use of foreign intermediate goods in producing exports (lower tariffs on intermediate goods).
  • Opportunity to emerge as manufacturing hub as companies assess their production base in China. But, India is lagging ASEAN. 
    • A combination of infrastructure investments, a reduction of tariffs and non-tariff barriers, and reforms to encourage the emergence of larger and more productive manufacturers are helpful. 
  • Global trade tensions have not affected much but the potential for reverberations through the investment channel is significant over the medium term

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