India must push reforms for a fair recovery
After last year’s pandemic-induced economic collapse, the global economy is on track to achieve a synchronized, albeit uneven, recovery. Just over a year after the first disaster, human ingenuity in the form of vaccines has mitigated its impact and accelerated this economic recovery.
Global economic growth (GEG) for 2021 is expected to be 5.5% or more, with emerging markets showing growth of over 7%. This will be the first synchronized growth since 2017, when global economic output rose 3.3%, and the highest in nearly five decades. Each of the 27 emerging markets represented in the MSCI Emerging Markets Index (MSCI-EM) will post a positive gross domestic product (GDP) change figure for the first time since the aftermath of the global financial crisis (GFC) in 2008. Aided by the gradual normalization of economies and significant monetary and fiscal accommodation in developed markets (particularly the United States), large emerging market economies such as India, China, Taiwan and Bangladesh are expected to post strong expansion.
The Chinese economy has rebounded earlier than the others, with a spectacular GDP growth of 18.3% in the first quarter of 2021 compared to the same quarter a year ago. The total value of Chinese exports grew 38.7% in this quarter, year-on-year. These huge jumps reflect a base effect, as China closed factories and locked cities in early 2020. Measuring this first quarter growth against the country’s performance two years ago, exports have increased by 15 , 3% relatively modest, and the trend indicates a deceleration. China’s challenge will be to balance the combination of growth in its construction and manufacturing sectors with growth in consumption.
Even as a veil of gloom descends on the global economy, strong divergences between and within countries are becoming visible. In all countries, economic decline and subsequent recovery have been shaped by the severity of the pandemic, the ability of health systems to respond, policy responses, the ongoing health costs for affected households, and the speed with which chains supply were able to return to normal. operations. Countries and sectors have varied considerably on these parameters, resulting in a multi-speed and uneven recovery process. Many countries, including India, face the adverse effects of subsequent waves, which necessitated restrictions on mobility and economic activity. In some countries, including Canada, the United States and China, household incomes increased in 2020 thanks to tax support. In the poorest countries, especially those with limited budgetary resources, this effect is less pronounced, and in some cases household incomes have been smaller than even large declines in GDP per capita. In countries and segments where incomes have declined, vaccine availability is limited and resources are stretched, the economic impact will persist for many quarters. Only about half of the world’s countries are expected to reach their pre-recession per capita peaks within two years, the lowest of any post-recession period in the past eight decades.
Equity markets rebounded, leading to an economic recovery in most markets. In local currency, markets in the United States, Canada, Germany, Taiwan, Korea and India are up about 80% from their lows in March last year (in many cases , to new heights). Indian indices are around 25% higher than their previous high in January 2020. These indicators show strong confidence in a global economic recovery and a return in corporate profits. As economies and corporate earnings recover, central banks will begin to reduce their accommodation. The US Federal Reserve telegraphed exactly that at its June meeting last week. The sustainability of this cyclical recovery also remains a challenge as the friction costs associated with three main long-term drivers have increased. Global flows of trade, technology and talent are now more restricted than before, endangering long-term growth and increasing the risk of inflation.
For India, this cyclical recovery should provide a cushion to undertake reforms. India has one of the largest output gaps among emerging markets, estimated at around 6% of GDP. This should keep inflation within India’s target range for some time, allowing policy action to target both supply and demand in the economy.
The country faces two major challenges in the medium term. First, India must address the inequalities of the recovery while putting the economy back on a balanced growth path within a few years; and second, it must resolve balance sheet crises in the banking, telecommunications and power distribution sectors.
Certain sectors, especially small businesses and many segments of the country’s population in rural and arid areas, will need budget support. If this budgetary support is to be carried out without a significant cost in terms of inflation, the fruits of the economic recovery will have to be better distributed. This will require further reforms in the areas of agriculture, infrastructure, education and health, as well as a lasting solution to the problems plaguing the public sector of our banking system.
PS: “Mind the gap” should become the decisive slogan for the world in the medium term. Savings, income, education, health, age, gender and digital divides have all widened in the wake of the pandemic.
This is the second in a two-part series on the post-pandemic global economy.
Narayan Ramachandran is President of InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand
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