Rescue the economy
Source: By G Srinivasan: The Statesman
As the country faces an existential threat of a slowing economy for the second year in succession, hope is now fastened on the next government to resolve the unfortunate baggage of policy taper and self-inflicted hurdles that led to the macro-economic muddles. India may have the advantage of talented techno-economists including the Prime Minister, the Deputy Chairman of the Planning Commission, the new RBI Governor and of course the Finance Minister who has been credited with possessing the expertise and experience of navigating the choppy waters of the domestic economy for far too long. But save the new RBI Governor, who is yet to acquire the patina of performance in steering the Indian economy, the rest have failed miserably and comprehensively and have landed the economy in the shambles it is today.
It would be pertinent to dwell at length on the latest Trade and Development Report (TDR) of the United Nations Conference on Trade and Development (UNCTAD). In its TDR, 2013, released on September 12, this maverick UN body, excoriated by the United States for its anti-capitalist tirades for long, has taken up a sub-theme to its main trope on “adjusting to the changing dynamics of the world economy”. The report’s set of recommendations is too important to be ignored particularly by emerging economies, including India, most of which are sailing in the same boat laden with a host of problems that drag down their performance by causing output gap and associated high inflation, currency concussions, widening current account deficit and unemployment.
Calling a spade a spade, Unctad states that the expansion of the global economy built on unsustainable global demand and financing patterns prior to the Great Recession of 2008 was conducive to developing and emerging economies. But reverting to pre-crisis growth strategies can no longer be an option as many developing and transitional economies are compelled to review development strategies that have been overly dependent on exports for growth. For Indian exporters, who enjoyed exceptionally salutary export performance till a year or two ago, but are now clamouring for crutches and soft interest to stay exporting, the message is pellucid but profound.
Arguing that it is a not a new insight that growth strategies relying primarily on exports must sooner or later reach their limits when many countries pursue them simultaneously, Unctad says competition among economies based on low unit labour costs and taxes have led to a race to the bottom, with few development gains but potentially lethal social consequences.
This is particularly so at the present juncture where growth of demand from developed countries is likely to remain weak for a protracted period of time. The limitations of such an export-led growth strategy are becoming even more obvious than in the past. Hence, it forcefully argues that continuing with export-led growth strategies through wage and tax competition would exacerbate the harm caused by slower growth in export markets and reduce any overall benefits. In these adverse circumstances, developing countries might need to take a comprehensive and longer-term perspective, entailing a shift in development strategies that accord greater heft to domestic demand as an engine of growth. It is time that the mandarins in the Ministry of Commerce, including the Commerce Minister, were a bit circumspect in seeking to articulate the insatiable appetite for more sops from the exporting community as part of the counter-cyclical package to rescue the economy from the doldrums.
Unctad states that a re-balancing of the drivers of growth with greater weight to domestic demand, though indispensable, is easier said than done as the road is replete with patches of hitches. These include boosting domestic purchasing power and managing the expansion of domestic demand in a way that precludes an excessive increase in import demand.
Besides, it also entails nurturing the inter-relationships between household and government expenditure on the one hand and investment on the other to enable the structural composition of domestic production to adjust to new demand patterns, notably through increased regional and South-South trade.
Unctad also underscores the critical importance of domestic demand as a major impetus for industrialization, while seeking greater integration into a rapidly globalizing economy. As growth of domestic demand accounts for about three-quarters of the increase in domestic industrial output in large economies, accelerating domestic demand growth could be highly beneficial for output growth and industrialization in a context of weakening external demand growth. Indian policy-makers should pay due heed to this as industrialization of India remains a task progressing at snail’s pace in recent years with the emphasis shifting to the services sector, while the less said about agriculture the better.
Stating that there is a strong inter-relationship between increases in household consumption, private investment and public expenditure, Unctad states that increased consumption of goods and services that could be produced domestically makes producers of those goods and services more willing to invest in their productive capacity.
Higher investment is not only a source of domestic demand (even if a large share of the capital goods may have to be imported), but it is also a pre-condition for the creation of employment and for productivity gains that allow wages to grow along with the purchasing power of domestic consumers. Besides, higher incomes of households and firms raise tax revenues, which can then be spent by the government for enhancing public services and infrastructure development, even at unchanged tax rates. Higher public spending, in turn, can create additional income for households and firms and improve the conditions for private investment. Such investment is required for increasing domestic supply capacity and thus for reducing leakages of domestic demand growth through imports.
Pertinently enough, Unctad states that while export-led strategies focus on the cost aspect of wages, a domestic demand-oriented strategy would focus on the income aspect of wages, as it is based on household spending as the largest component of effective demand.
If wage growth follows the path of productivity growth, it will create sufficient of domestic demand to fully employ the growing productive capacities of the economy without having to rely on continued export growth. It is high time India’s policy wonks woke up to the stark reality before the economy loses the lingering momentum and becomes moribund.
Source: By G Srinivasan: The Statesman
As the country faces an existential threat of a slowing economy for the second year in succession, hope is now fastened on the next government to resolve the unfortunate baggage of policy taper and self-inflicted hurdles that led to the macro-economic muddles. India may have the advantage of talented techno-economists including the Prime Minister, the Deputy Chairman of the Planning Commission, the new RBI Governor and of course the Finance Minister who has been credited with possessing the expertise and experience of navigating the choppy waters of the domestic economy for far too long. But save the new RBI Governor, who is yet to acquire the patina of performance in steering the Indian economy, the rest have failed miserably and comprehensively and have landed the economy in the shambles it is today.
It would be pertinent to dwell at length on the latest Trade and Development Report (TDR) of the United Nations Conference on Trade and Development (UNCTAD). In its TDR, 2013, released on September 12, this maverick UN body, excoriated by the United States for its anti-capitalist tirades for long, has taken up a sub-theme to its main trope on “adjusting to the changing dynamics of the world economy”. The report’s set of recommendations is too important to be ignored particularly by emerging economies, including India, most of which are sailing in the same boat laden with a host of problems that drag down their performance by causing output gap and associated high inflation, currency concussions, widening current account deficit and unemployment.
Calling a spade a spade, Unctad states that the expansion of the global economy built on unsustainable global demand and financing patterns prior to the Great Recession of 2008 was conducive to developing and emerging economies. But reverting to pre-crisis growth strategies can no longer be an option as many developing and transitional economies are compelled to review development strategies that have been overly dependent on exports for growth. For Indian exporters, who enjoyed exceptionally salutary export performance till a year or two ago, but are now clamouring for crutches and soft interest to stay exporting, the message is pellucid but profound.
Arguing that it is a not a new insight that growth strategies relying primarily on exports must sooner or later reach their limits when many countries pursue them simultaneously, Unctad says competition among economies based on low unit labour costs and taxes have led to a race to the bottom, with few development gains but potentially lethal social consequences.
This is particularly so at the present juncture where growth of demand from developed countries is likely to remain weak for a protracted period of time. The limitations of such an export-led growth strategy are becoming even more obvious than in the past. Hence, it forcefully argues that continuing with export-led growth strategies through wage and tax competition would exacerbate the harm caused by slower growth in export markets and reduce any overall benefits. In these adverse circumstances, developing countries might need to take a comprehensive and longer-term perspective, entailing a shift in development strategies that accord greater heft to domestic demand as an engine of growth. It is time that the mandarins in the Ministry of Commerce, including the Commerce Minister, were a bit circumspect in seeking to articulate the insatiable appetite for more sops from the exporting community as part of the counter-cyclical package to rescue the economy from the doldrums.
Unctad states that a re-balancing of the drivers of growth with greater weight to domestic demand, though indispensable, is easier said than done as the road is replete with patches of hitches. These include boosting domestic purchasing power and managing the expansion of domestic demand in a way that precludes an excessive increase in import demand.
Besides, it also entails nurturing the inter-relationships between household and government expenditure on the one hand and investment on the other to enable the structural composition of domestic production to adjust to new demand patterns, notably through increased regional and South-South trade.
Unctad also underscores the critical importance of domestic demand as a major impetus for industrialization, while seeking greater integration into a rapidly globalizing economy. As growth of domestic demand accounts for about three-quarters of the increase in domestic industrial output in large economies, accelerating domestic demand growth could be highly beneficial for output growth and industrialization in a context of weakening external demand growth. Indian policy-makers should pay due heed to this as industrialization of India remains a task progressing at snail’s pace in recent years with the emphasis shifting to the services sector, while the less said about agriculture the better.
Stating that there is a strong inter-relationship between increases in household consumption, private investment and public expenditure, Unctad states that increased consumption of goods and services that could be produced domestically makes producers of those goods and services more willing to invest in their productive capacity.
Higher investment is not only a source of domestic demand (even if a large share of the capital goods may have to be imported), but it is also a pre-condition for the creation of employment and for productivity gains that allow wages to grow along with the purchasing power of domestic consumers. Besides, higher incomes of households and firms raise tax revenues, which can then be spent by the government for enhancing public services and infrastructure development, even at unchanged tax rates. Higher public spending, in turn, can create additional income for households and firms and improve the conditions for private investment. Such investment is required for increasing domestic supply capacity and thus for reducing leakages of domestic demand growth through imports.
Pertinently enough, Unctad states that while export-led strategies focus on the cost aspect of wages, a domestic demand-oriented strategy would focus on the income aspect of wages, as it is based on household spending as the largest component of effective demand.
If wage growth follows the path of productivity growth, it will create sufficient of domestic demand to fully employ the growing productive capacities of the economy without having to rely on continued export growth. It is high time India’s policy wonks woke up to the stark reality before the economy loses the lingering momentum and becomes moribund.
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