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Modi government’s economic challenges ahead

View of West of Delhi (CC BY-SA 2.0) by jepoirrier

The Index of Industrial Production shrank by 3.4 per cent in November last year. It had risen to 9.4 per cent in October. This could be a temporary phenomenon. But still it makes one wonder what is going to happen to ‘Make in India’ dream of Prime Minister Narendra Modi when manufacturing growth is so erratic. There is a changed global environment today from when Mr. Modi made his promises. Commodity prices are falling and the steepest fall has been in the price of oil which has declined by 70 per cent since 2014. The benefits of low oil price have gone mainly to the government and as a result, the balance of payments situation has improved. But the necessary stimulus to demand due to savings from historically low oil prices by individuals is still missing. Demand and private investment are low and retail inflation is rising.

People painting a doomsday scenario are predicting a worldwide recession coming from China. But China will weather any recessionary storm with its huge foreign exchange reserves of $3.3 trillion and extensive infrastructure in place.  China has indeed reduced its demand for commodities and its imports have fallen because it is trying to rebalance its economy. It is deliberately slowing down and opting out from its erstwhile export led growth strategy and concentrating on domestic economy instead.

The fast growth averaging around 8.5 per cent per annum for three decades in the past has created severe environmental problems in China and it has also led to skewed income distribution in which the rich- poor divide has widened. China’s income gap is among the world’s worst with the poorest quarter of households having just 1 per cent of total wealth.  Chinese government now seems to be focused on keeping the peasants and factory workers happy by enhancing their incomes through domestic investment in rural infrastructure, health, education and tackling water pollution. This is because while China has prospered, the common Chinese though not in poverty, still has a comparatively lower standard of living thanthe average European or American. The average per capita income is $ 3865.88 per year in China as opposed to US per capita of $46,405.26 ( 2014).

There is also overcapacity in infrastructure. It can be seen empty townships populated by tall buildings in central China. But the slowdown is deliberate and now China wants to utilise what it has built and create jobs for the people so that these buildings are occupied and its manufacturing capacity is utilised to make goods for the people. Its manufacturing industry will slow down no doubt, but there will be retraining of retrenched workers.

India’s exports have also plummeted but not only because of China’s slack demand for iron ore and other raw materials but also because of weak global demand from the US and EU.

China is a game spoiler for developing countries’ exports also by its devaluation of the Yuan since August 2015. The Yuan has depreciated by 6 per cent since then. It is now fixed to a basket of currencies rather than to the dollar. There were huge capital outflow of $300 billion in the third quarter of 2015 and the People’s Bank of China had to neutralise the impact by selling dollars from its reserves to cushion the impact on the stock markets which crashed. China’s aim is to outbid the competitors, including India in international markets, when its exports are falling. Western nations are now afraid of more Chinese goods flooding their markets. India should also take heed because China is producing consumer goods at very low prices which will remain competitive even when the rupee has fallen to Rs 67 per dollar.

More and more countries around the world will try to become protectionists specially those countries affected by crash in commodity prices. Their balance of payments situation may become precarious and untenable if they remain open as before. India and China are very big economies with huge population. Looking inwards at the home market would be a good strategy to follow for India also and make people better off through job creation.

Creating jobs in the service industry could be a way forward because it is the fastest growing sector. Even though the investment thrust should be directed at the manufacturing sector, training people in IT, tourism, transport, insurance, real estate, business services, community and personal services and construction services will be important to absorb the job seeking youth.

Mending the Indian economy ought to be the focus in times of global stagnation and the decline in global trade and growth in 2016. The government’s policy of focusing on agriculture and rural infrastructure will boost rural demand for manufactured goods so that industrial growth gains momentum. Without reforms in agriculture—in irrigation, storage, marketing and transportation, the targeted 4 per cent growth will not be possible.

The world will be environmentally better off with China slowing down and its demand for commodities waning. There has been too much mining and production of commodities in the past which if continued would lead to unsustainable development on this planet.

India also has a problem of achieving growth with equity and sustainability because larger pockets of poverty exist in India than in China. It is a very serious challenge ahead especially if India is aiming at 8 percent GDP growth because high growth will accentuate inequality of income unless the poor are protected by a social safety net. China has provided its citizens with a comprehensive welfare cover and its infrastructure is superior in many ways to India’s. Undoubtedly China’s recovery will take place but as Han Jun from China’s office of the Central leading group for finance and economic affairs said in New York recently: China’seconomic recovery pattern will be L shaped rather than faster V or U shaped. India’s welfare schemes for the poor have got started but have to be extended to a wider section of the population.

China and India are facing the same problems of air and water pollution, problematic healthcare system, uneven quality of education, stressed agricultural and corruption. But India does have a scope of occupying the space left by China in manufacturing if public investment increases in infrastructure and skill development.

JAYSHREE SENGUPTA
29 January 2016

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