Poor global demand might make it tough for India to crank its growth engine
Is the world economy heading towards a sharp deceleration in growth, pulling down India's own story in its wake? The chorus is growing stronger as economic recovery sputters in the world's major economies. Early this month, the International Monetary Fund (IMF) cut its global growth forecast for a second time this year, citing weak commodity prices and a slowdown in China.
In October, IMF forecast the world economy would grow 3.1 per cent this year, down from its July estimate of 3.3 per cent growth. For next year, it cut the growth forecast to 3.6 per cent, from 3.8 per cent earlier. As recently as April it expected the world economy to grow 3.5 per cent this year.
A downgrade by IMF follows a similar move by its Bretton Woods cousin, the World Bank. In its forecast in June, the institution expected the world economy to grow 2.8 per cent this year, down from three per cent estimated in January. In 2014, the bank had expected the world economy to grow 3.5 per cent in 2015.
As flagged by IMF in its October edition of the World Economic Outlook (WEO), the world faces lack of aggregate demand, leading to an output gap in major economies. This is visible from the growing gap between gross savings and gross investments.
In calendar year 2013, global savings exceeded investments by $543 billion, equivalent to 29 per cent of India's gross domestic product (GDP) at current prices in dollars that year. To revive growth, IMF asked for more demand stimulus from policymakers but it's not coming, as major countries, including India, are doing fiscal contraction rather than stimulus.
Policy makers have outsourced demand stimulus to their central banks which have responded to the request by printing more currency and driving the policy interest rate to nearly zero in the developed world. Cheaper credit has, however, not stimulated demand and investments, as indicated in the savings-investment chart.
"There is a lot of monetary stimulus but little or no fiscal stimulus that could lead to immediate jump in consumption. The world needs at least one big centre of consumption or investment demand to kick-start the growth cycle but it's not coming," says Anoop Bhaskar, head of equity, UTI Mutual Fund.
The recent GDP downgrade by the Fund and continued slump in global trade and commodity prices suggest a further deterioration in global demand. A fall in commodity prices, including oil, is hitting economic growth in the emerging markets, as they adjust to lower export revenues.
"Developing countries were an engine of global growth following the 2008 financial crisis but they now face a more difficult economic environment," wrote World Bank group president Jim Yong Kim in its Global Economic Prospects (GEP) report of June this year.
This will make it tough for India to crank up its growth engine, as exports have been a key component of its growth strategy since the early 1980s.
Exports of goods and services accounted for 23.6 per cent of India's GDP in 2014, up from 8.3 per cent in 1991 and around four per cent in the 70s according to data from the World Bank. India's export share is now higher than China's, whose export intensity declined to 22.6 per cent (of GDP) last year from a peak of 35.7 per cent in 2006.
"During the golden growth era between 2003 and 2008, exports provided anywhere from a quarter to a fifth of additional GDP growth to India. Given that exports are now de-growing, we have to cut GDP growth projections by a similar proportion," Bhaskar adds.
Economists say the global supply-demand mismatch will take at least two years more to clear. "IMF commentary suggests global output will not clear before 2017 and we can expect slower growth till then," says Madan Sabnavis, chief economist, ICRA Ratings.
In the past, advanced economies provided global growth stimulus by running current account deficits, allowing emerging countries to grow faster by ramping up exports to Europe, North America and Japan. The roles have reversed and advanced economies have now turned net exporters, squeezing out growth options for emerging countries such as India. In 2013, advanced economies had their first current account surplus in 15 years, while emerging markets' surplus shrunk further.
Dhananjay Sinha, head, institutional equity, Emkay Global Financial Services calls it reverse de-coupling, that exposing emerging markets to funds outflow especially if the US Fed starts normalising interest rates. "Evidence of reverse de-coupling since 2012 indicates improving growth in developed economies is not transmitting to emerging markets. This could lead to a further decline in portfolio flows to India and further depreciation in emerging market currencies, including the rupee," adds Sinha.
Experts agree India is more sheltered from global turmoil than many of its peers from emerging markets but it can't remain unaffected. The economy might continue to grow but at a slower pace than in the immediate past. Are we ready for a new normal?
(BS)
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