Economic tasks get harder in 2017

The Modi Government, recharged with its poll triumphs, must now settle down to addressing the economic ills which have so far eluded effective solutions and stunted growth with some baneful if transient, effects of demonetisation.

To his credit, the Prime Minister did acknowledge that "mistakes" may have been made but that there was an unremitting focus on pro-poor policies ('Garib Kalyan') leading to the UP triumph. And he has viewed this victory as a mandate for a "new India", where the poor would be fully empowered, and the middle class would have fewer burdens than at present. This is a goal he has set for 2022, the 75th year of India's Independence.

Welcome as the signals that Prime Minister has given are, the economy continues to perform far below its potential with a dismal record regarding job creation over the three years notwithstanding all claims and drumbeat about maximum governance and reforms. Even as the global economy is now seen to be at last turning the corner, from the latter half of 2016, India's growth had slowed down in fiscal 2017.

Ahead of the meeting of G-20 Finance Ministers in Baden-Baden (Germany) on March 17-18, the IMF has stuck to 6.6 per cent for India's growth for the current fiscal year. It projected a rise in growth rate to 7.2 per cent in fiscal 2017/18, hopefully picking up "once the effects of cash shortages linked to the currency exchange initiative fade".

It has emphasised on India adopting corporate and bank balance sheet repair as a pre-condition for sustaining growth. The economy has already experienced some capital outflows in current fiscal year. The strong US dollar, the rise in global interest rates--the US Fed is set to announce its second instalment of a hike on February 15--and the possible recourse to protectionist policies by the Trump Administration would all impact on India's growth, especially with an export slowdown.

Global financial conditions could tighten faster than expected because of a more rapid rise in interest rates in the United States driven by inflationary pressures. In such a scenario, emerging economies with high public and/or private non-financial sector debt, weak bank balance sheets, and depleted policy buffers would be particularly vulnerable to capital flow reversals, tighter financial conditions, and sharp movements.

What are considered imperatives for emerging economies like India are more prudent risk-management practices, including by reducing currency and maturity balance sheet mismatches, to lessen vulnerabilities to global financial conditions. While India's fiscal deficit is expected to continue narrowing in the near-term, IMF has suggested further subsidy reduction, tax reforms, and a "robust design and full implementation" of GST for medium-term fiscal consolidation.

For growth, unless India overcomes the current "Twin Balance-sheet Problem" as the pre-Budget Economic Survey, called it, the long-awaited private investment will not revive. Nor the Banking finance of the requisite proportions would be forthcoming to reinforce growth segments. The government has not shown any inclination to raising recapitalisation badly needed for the stressed banks beyond the Rs.10,000 crores budgeted for 2017/18.

China and India are assumed to continue to contribute more than three-quarters of total global GDP growth in 2017 which IMF has projected at an enhanced 3.4 per cent as against 3.1 per cent in 2016. China has already set its growth target for 2017 at 6.5 per cent, lowered from its 2016 growth at 6.7 per cent.

China's policy-makers insist that its economy has stabilised and showed more signs of warming, thanks to new growth policies, structural reform and policy innovations.

But IMF, taking a somewhat cautious stance, points out any failure in China to adjust macroeconomic policies from "current loose stance and a lack of decisive reform" would increase vulnerabilities—given high and rapidly rising debt, impaired corporate balance sheets, and the increasingly large, opaque and interconnected financial sector. Any abrupt downshift could have sizeable spillovers to the rest of the world through trade, commodity price, and confidence channels.

In this setting, G-20 Finance Ministers have been urged to take collective decisions on the key issues involved since multilateral action alone can provide safeguards against risks and maximise gains from economic integration. IMF and other institutions are proceeding on the assumption that the Trump Administration, whose budget would be unveiled soon, would go for an expansionary fiscal policy.

The G-20 Ministers are meeting at a time when global growth signs are more positive. A cyclical turnaround is expected to emerge with a robust pick-up in advanced economies, notably the USA and the Euro area, UK, and Japan. At the same time, the risks are no less than before, given the uncertainty about economic and trade policies in the USA under President Donald Trump.

Due to the noise on protectionism in USA triggered by Trump himself in his campaign speeches calling for a tax on imports and China's reprisal warnings, IMF Chief Christine Lagarde has cautioned G-20 against "self-inflicted" injuries from policies which would seriously undermine trade, migration, capital flows and sharing of technologies across borders. Such measures would hurt productivity, incomes, and living standards of all citizens, she said.

G-20 Finance Ministers are being called upon to strengthen financial systems and protect and reinforce trade as an engine of broadly shared growth. On the one hand, coordinated actions between countries to boost growth can exploit synergies and amplify each other. On the other hand, meanwhile, unsustainable policies in one country can spread quickly to others through spillovers or contagion.

The recent political backlash in advanced economies against the rules-oriented multilateral trade framework poses a threat to a critical source of global productivity growth. While many advanced economies still experience demand shortfalls and core inflation below target, the outlook has generally improved, helped by a notable cyclical upturn in global manufacturing and trade. IPA