dna edit: Signs of revival

The International Monetary Fund (IMF)’s biannual World Economic Outlook report confirms the positive trends that have been shaping up for two quarters now. The global economy’s recovery is firming up across the board. While advanced economies are set to jump to 2.2 per cent growth this year from 1.3 per cent last year, emerging economies will see a smaller jump from 4.7 per cent to 4.9 per cent; India is expected to recover to a 5.4 per cent growth rate. But the optimism doesn’t come without its caveats. The positive outlook for emerging markets is still dependent to a considerable extent on internal reforms — and, contrary to the conventional wisdom international financial organisations including the IMF have espoused for decades, that income inequality could damage macroeconomic growth.

Broadly speaking, two contradictory developments could affect emerging market growth. As advanced markets begin to perform better, the US Federal Reserve is likely to normalise its monetary policy and taper quantitative easing. This would result in a tightening up of foreign capital inflows for emerging economies as the former see rising interest rates and become attractive investment destinations again. Set against this is the likelihood of an increase in exports for countries like India’s given improved performance spurring demand in advanced economies. In an ideal environment, the latter factor would outweigh the former — but achieving that environment will depend upon the ability of emerging economies to institute structural reforms such as improved infrastructure for removing supply side bottlenecks. That is particularly true for the Indian economy, pegged by the report as being more dependent upon internal factors than external.

The nature of the expected growth — assuming Delhi is able to take full advantage of the improving environment — is a matter of debate as well. The report doesn’t expand upon its initial assertion that income inequality may come to dominate the scene, but it is a confirmation of a growing number of voices in recent years that have pushed the idea of growing socio-economic disparity dragging down growth. Noble laureate economists Joseph E Stiglitz, Paul Krugman and Amartya Sen, among others, have taken different paths to this conclusion. In a country like India with its latent reserves of human capital, this issue assumes an outsize significance. Inadequate public resources in areas like education and health have a disproportionate impact upon the economically disadvantaged given the elite’s ability to access the relatively more efficient private sector. Given the country’s demographics and socio-economic distribution, the inevitable result of this will be a failure to realise the potential of its youth bulge if no corrective is applied.

The upswing in the global economic environment will provide the government that come to power after the elections a grace period. If it is to nudge India’s macroeconomic figures north in a sustainable fashion, the new dispensation must carry out infrastructure and regulatory reforms, implement an equitable growth model that doesn’t depend solely on the old ‘a rising tide lifts all ships’ principle and maintain a fine balance between spurring export, boosting domestic consumption and keeping inflation in check. It will have its work cut out for it.