Originally Published 2020-01-23 11:29:06 Published on Jan 23, 2020
Has India become the global fall guy?

It can’t be very gratifying being the Finance Minister when the International Monetary Fund is calling out India for being a growth laggard pulling down world growth in 2019 to 2.9 per cent (from 3.3 per cent forecast earlier) and in 2020 to 3.4 per cent (from 3.6 per cent forecast earlier).

International financial institutions are notorious for fawning adulatory during the good times – eagerly overestimating country growth because it makes the IMF in some weird way look better as a presumed “manager” of global stability and growth.

In bad times the managerial incentive is to finger someone else as being responsible for the world’s problem. The IMF has chosen India, this time around, to hang the blame hat on. Could this be merely convenient because India has gone out of its way to become the global “bad guy” making international headlines as plagued by social dissent and divisiveness, thereby making the IMF story plausible.

Sadly, even in our adversity, we glory in our presumed systematic importance for global growth. We want to “matter” globally – the ultimate colonial complex! Hey guys! I am going down. But you know what? I am going to take all of you with me.

The sad truth is India does not matter globally. Our GDP (even per the IMF on PPP basis, which incidentally statistically inflates our share in the global economy) is just 7.7 per cent of the global GDP. Consider that the 39 advanced economies account for a share of 41% out of which the US is 15% and the EU area 11 per cent.

Even amongst the tangled quagmire of 155 “emerging economies” India is not a leader. China has a share of 19 per cent; ASEAN of 5.5%; Emerging Europe including Russia of 7.2 per cent; Latin America and the Caribbean 7.5 per cent and the middle East of 8.2 per cent. The sooner we face up to the fact that we are not a growth leader the faster we will be able to become one.

In global trade we are even more insignificant. We benefit from overseas demand but don’t do much to provide it – except in nature destroying oil and coal. Our share in global trade is just 2.2 per cent – barely noticeable.

Every other regional grouping of emerging economies mentioned above has a share in global trade 2.5X to 3X of ours – roughly in line with their share in global GDP. China has a share of just above one half of its share in global GDP.

Unlike all the emerging economies, mentioned above, we are not a globally integrated economy even today because our share in trade is less than one third of our share in global GDP.

This means the global trade and GDP impact of a floundering India is miniscule. Bad times in India are easily substitutable by growth in a host of other countries.

We are a growth “taker” not a growth “supplying engine”. The IMF knocking off 1.3 per cent of GDP growth in India for 2019 (4.8 per cent versus 6.1 per cent estimated earlier) accounts for a global loss of GDP growth of $136 billion (PPP terms). This is just 3 per cent of the $4.5 trillion (PPP terms) global growth which the IMF expected would be added in 2019.

It is no fun being the global fall guy. But the strategy should not be to hang our head in shame because we have been knocked off a high pedestal thrust upon us by multilateral agencies for their own managerial purposes like talking-up the global economy even when it is sinking.

Far from being a growth pole, as President Trump claims, the US, by succumbing to its inability to come to terms with being second to China in the near future, is the primary cause of global disruptions of the nasty kind. These have knocked out the boat of global stability and open trade which enabled the developing world over the previous three decades, to grow on their own economic merits and lift millions of people out of the scourge of poverty – including in India.

All that has been written off by President Trump boosting his re-election prospects by rallying resentment against China and Iran. The staggering thing is that the IMF is fast to condemn India. But it uses the most diplomatic language to obscure the fact that the responsibility really lies in the collapse of institutional integrity in the US.

Oddly, the IMF still believes that growth in 2020 will miraculously recover in India. There is little value in even citing the forecast growth rate of 6.1 per cent for 2020 which has been kicked forward like a ready-made football from 2019 to 2020. The domestic view on the growth possibilities for 2020 are very pessimistic.

Much will depend on the extent to which Finance Minister Nirmala Sitharaman is permitted to radically recast the FY 2021 budget. If the budget is just a continuation of last year’s we can rest assured, there will be no substantive recovery.

A downbeat FY 2021 is not an inevitability, despite the continuing clouds over the global economy. In fact, global downturns have their benefits for India because our economy is inversely linked to the price of oil. A sharp increase usually spells disaster. Softening oil prices are good for Indian economic stability.

Analysts will be watching out for what the FM does to revive demand before picking up the phone to advise “buy”. Hopefully the FM will not be deceived into bothering too much about sticking to Arun Jaitley’s self-imposed “fiscal rectitude” as a performance metric for the annual report card of ministers which the BJP prepares.

Far more important will be to look closely at allocations which are win-win and shun or put on the backburner others, conceived at a time of economic imperialism. For FY 2021 only those options should be funded which are good for politics; make the poor resilient to shocks and which compensate the poor fully against the inevitable resulting inflation -in the same manner as the government protects its own employees.

The added advantage is that a short period of inflation devalues, in real terms, the existing debt levels and the previously unsustainable cost of servicing them and pumps up corporate balance sheets which in turn chuffs up the investing class – both corporates and individuals.

These options exist. But it is an open question whether North and South Block will be agile enough to spot them or whether they will act like the museum pieces they are expected to become, as early as 2024.

This commentary originally appeared in The Times of India.

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Sanjeev Ahluwalia

Sanjeev Ahluwalia

Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...

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