India grows, but high ineqality
By Shivaji Sarkar
The world economy has grown at 3 per cent but still the pace of global investment is uncertain, whereas Indian economy will grow at 7.2 per cent and is projected to do better. This is the surmise of the United Nations World Economic Situation and Prospects (WESP) 2018 report from its department of economic and social affairs that has set the 17 SDGs and 169 associate targets to be achieved by 2030.
According to the report, in 2017, world economic growth has reached 3 per cent—the highest growth since 2011—as crisis-related fragilities and the adverse effects of other recent shocks subside. The improvement is seen in roughly two-thirds of countries worldwide experiencing better growth in 2017 than in the previous year. Global growth is expected to remain steady at 3 per cent in 2018 and 2019 up from 2.7 per cent a year back.
The report says that the Indian growth rate will be result of robust private consumption, public investment and structural reforms, but it still faces the risk of sudden capital withdrawal on account of monetary policy normalisation in developed countries. India would have to tread cautiously as Europe and the US show better recovery. It can lead to capital flight and finances may become expensive for Indian investors.
The recent improvements in economic conditions, however, have been unevenly distributed across countries and regions. East and South Asia would remain the world’s dynamic region. In 2017, the two regions accounted for nearly half of global growth, with China alone contributing about one-third.
The end of recession in Argentina, Brazil, Nigeria and the Russian Federation also contributed to the rise in the rate of global growth between 2016 and 2017. The upturn has been supported by a rebound in world trade and an improvement in investment conditions.
While India is concerned about its rising inflation and fall in growth, the UN report as well as the World Inequality Report (WIR) 2018 of World Inequality Lab are pointers to difficult global situation raising questions whether India should reconsider its decision to be part of the globalised economy or not. The silver lining is that the WESP’s hope rests on South Asia, particularly India, benefiting from robust domestic demand and supportive macroeconomic policies.
According to WESP, the improvement in 2017 is more an indication of economic stabilisation. Developing countries will continue to be the drivers of global growth, but it may be impacted by the improvements in the developed economies.
Amid this hope is also the WIR criticism of globalisation. It states that the richest one per cent captured as much as the poorest 50 per cent of world population since 1980. In other words, since 1980, 27 per cent of all new income worldwide was captured by the richest one per cent while the poorest one per cent had only 13 per cent growth.
India is in a worse situation as per WIR. Deregulation and opening-up reforms in India since 1980s have led to substantial increase in inequality so much that top 0.1 per cent of earners has continued to capture more growth than all those in the bottom 50 per cent combined. The WIR clubs India with Brazil and sub-Saharan Africa in income inequality. India is a little better than the Middle East, termed as the world’s most unequal region, where the top 10 per cent capture 61 per cent of the national income.
The WIR wants a public debate to fill the democratic gap to end inequality amid projection that income and wealth inequality would continue up to 2050 under different scenarios. It even says if business practices are not changed, global inequality will further increase. The only possible path for reducing it and eradicating poverty is to follow the “moderate inequality trajectory of Europe over the past decades”.
It says that the combination of large privatisations and increasing income inequality has fueled the rise of wealth inequality among individuals. It is extreme in Russia and the US and moderate in Europe as per WIR.
The UN WESP showing a path underscores the “need to redouble the efforts to bring the global economy back on a stronger and more inclusive growth path and create an international economic environment that is conducive to sustainable development.”
The world economy also faces longer-term challenges. The WESP highlights four areas where the improved macroeconomic situation opens the way for policy to address these challenges: increasing economic diversification, reducing inequality, supporting long-term investment and tackling institutional deficiencies. The report notes that reorienting policy to address these challenges can generate stronger investment and productivity, higher job creation and more sustainable medium-term economic growth.
According to the report, the moderate improvement is more an indication of economic stabilisation than a signal of a robust and sustained revival. As commodity prices trend higher, commodity-exporting economies are likely to see some recovery in growth.
The report projects that headwinds arising from weak investment and policy uncertainty continue to constrain economic activity. The GDP growth in the least developed countries (LDCs) is projected to remain well below the (SDG) target of at least 7 per cent. “This represents a key issue to address if the SDGs overall are to be attained”, the WESP had noted in its 2017 report as well.
The 2017 report noted that under the current growth trajectory and assuming no decline in income inequality, nearly 35 per cent of the population in LDCs may remain in extreme poverty by 2030. It is a crucial UN statement indicating that the world is not moving for a better direction.
The WESP report identifies prolonged weak investment as a major cause of the slowdown in global growth. India is an exception though as the WESP finds that it has controlled fiscal deficit. However, inflation heads beyond Reserve Bank tolerance limit of 5 per cent.
At the same time, labour productivity growth has slowed markedly in most developed economies and in many large developing and transition economies. The report stresses the importance of investment in new capital as a driver of technological change and efficiency gains but cautions that the world has worse ecological conditions and higher pollution as energy use increases. India can do better with tightrope walking.—INFA