Challenge for G-20 summit
China has worked hard for months to make the first G-20 Summit under its leadership a landmark event to achieve the revival of global growth and trade - in a more challenging environment post-crisis with low incomes and rising inequality across nations. Globalisation itself is in peril.
Growth of world economy, however subdued, has bypassed low-income earners in many countries coupled with job losses, triggering new anxiety about globalisation itself and "worsened the political climate for reform", as candidly acknowledged by IMF
The Brisbane Agenda of yesteryears to raise world output by additional two percentage points by 2018 is now as good as given up. At stake is reviving a weakened global economy in a deflationary situation and slowing investment growth and trade. IMF's revised down projections for 2016 are growth at 3.1 percent and trade 2.7 percent.
The challenge before leaders of 20 major economies, as they meet in the southern Chinese city of Hangzhou on September 4 and 5, is to launch a more forceful, comprehensive and coordinated action programme. Meanwhile, IMF itself has called for a "short-term growth stimulus" through "structural reforms" which would allow new job seekers to find work faster.
The modest pace of economic activity globally is attributed to investment slowdown mainly due to private sector debt overhangs and financial sector balance sheet issues in many countries, low productivity growth trends, and demographic factors. And, as IMF points out, these would weigh on long-term growth prospects, further reducing incentives for investment despite record-low interest rates.
While financial markets may have largely recovered from the shocks in the aftermath of the Brexit vote, potential weaknesses remain in the financial sector. There is also uncertainty in the not-so-distant future concerning the development of a relationship between the United Kingdom and the European Union. Overall, there are plenty of downside risks for both advanced and emerging economies, including through spillovers.
In a Note for the Hangzhou Summit, IMF points out that a lack of structural reforms and public investment, including among G-20 countries, is a key reason behind low growth. (In July, IMF had scaled down projections for several economies including India. New Delhi sticks to 7.6 percent for 2016 though Finance Ministry officials rely on the good monsoon to project 8 percent).
In the first quarter of fiscal 2017, (April-June), India's GDP is projected by CSO at 7.1 percent (as against 7.5 in the corresponding first quarter of fiscal 2016 and 7.9 percent in the last quarter ending March). There is certainly some loss of momentum in the first quarter of fiscal 2017 nor any visible improvement so far into the second quarter.
In terms of now-prevalent Gross Value Added (GVA) at basic prices, growth was 7.3 percent in First quarter while WPI and CP inflation were estimated at 7 percent and 5.7 percent respectively for April-June. The slump in demand, domestic and external, is taken as the main factor for the first quarter slowdown. Exports had fallen for 18 months till June.
On India, IMF's G-20 Note for the Hangzhou Summit merely, says, "high-frequency data suggest continuing strong growth, underpinned by private consumption". But IMF makes a general observation that "Where monetary policy operates near or at the lower bound, growth-friendly fiscal policy has an important role to play". This has special significance for India, given the RBI monetary policy stance in view of inflation expectations.
In passing, IMF also took note of India's GST, as an important step which, when fully implemented, promises to boost tax buoyancy and growth, including enhancing the efficiency of the internal goods and services markets.
But IMF has also emphasised the need for economies taking advantage of the current low-interest rate environment and depending on the availability of fiscal space, to consider more public investment. Other helpful measures include adjusting the composition of spending toward public investment and moving the revenue structure toward taxes "relatively less detrimental to growth.
Also, keeping in view the widening income disparities and securing inclusive growth, countries are advised to make taxation more progressive and also strengthen social safety nets. Both tax and expenditure policies need to be carefully calibrated to balance equity and efficiency goals. There is also renewed emphasis on financial market reforms for effective transmission of monetary policies.
On risks downside, IMF refers to the likely return of financial volatility, triggered by geopolitical tensions or risks associated with the negotiations after the “Brexit” vote. The global growth outlook could be further undermined by a lack of consensus for reform or rising real interest rates triggered by a drop in inflation expectations.
Possible risks include turbulent patches in China’s welcome transition to a more sustainable but lower growth path, which could generate significant spillovers, most directly through trade and commodity market channels.
China has attached considerable importance to the revival of trade as much as growth as also investment. This is highly important since G20 countries account for about 80 percent of global trade and China is the world's leading exporter. While weakened output resulting from lack of global demand has resulted in a slowdown in international trade, in turn negatively impacting on growth itself.
Trade volumes in goods and services trade had grown only 3 percent a year since 2012, half the rate recorded in two decades pre-crisis. In earlier decades, trade growth always outpaced growth in output. Weaker economic activity and slowing investments have sharply slowed the pace of trade growth. But restrictive trade policies and regionalisation in global trade have also been leading contributory factors.
There has been a retreat from multilateralism by several countries, maybe selectively, including India. Restoring the role of trade in supporting economic growth requires a determined global policy effort to further reduce trade costs and roll back the recent increase in temporary trade barriers, IMF said.
This Summit in China has acquired extraordinary importance amid ongoing global rivalries and tensions, especially in the Asian region. G-20 leaders take note of the broader context and challenges before the global community in these Summits. It would be natural to expect some tough negotiation over the formulations in the final statement of the Summit.
There would be plenty of bilateral summits of leaders gathered in Hangzhou involving President Obama, Chairman and host, Xi Jinping, and Russian President Putin. China's Foreign Minister and other dignitaries had met a series of world leaders including Prime Minister Narendra Modi in recent weeks to ensure a highly successful Summit which helps not only revive growth and trade but also reshape the world economy.
(The views expressed are strictly personal.)