Hope amid uncertainty: On IMF World Economic Outlook

Hope amid uncertainty: On IMF World Economic Outlook

Context: The International Monetary Fund has lowered its global growth forecast for this year and next in the wake of the pandemic.

Relevance:

1. GS Paper 3:  Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein

Mains questions:

1. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. 15 marks
2. Among several factors for India’s potential growth, savings rate is the most effective one. Do you agree? What are the other factors available for growth potential? 10 marks

International Monetary Fund forecast:

• The global economy is projected to shrink 4.4% this year.
• In the IMF’s estimation, in 2020, growth of India’s gross domestic product (GDP) will witness a contraction of over 10%.

Causes of lower GDP growth:

• Worldwide lockdown across the globe disrupted the global supply chain, which further reduced value of trade among the countries.
• The demand in economy reduced which negatively affected the industrial output and employment generation.
• Trade war between USA and China also negatively impacted the global growth because it created competitive trade barriers among the countries.
• Risks associated with predicting the pandemic’s progression, the unevenness of public health responses, and the extent to which domestic activity can be disrupted, magnify the uncertainty.

Why GDP growth matters:

• Growth matters primarily because it directly impacts the average income levels. If, for instance, GDP grows at an average inflation-adjusted (real) rate of 8% per annum, an average Indian would roughly double her income in 10 years. A more modest 5% GDP growth would mean that the same journey would take 17 years.
• If the GDP growth rate were to revert to the pre-1979 trajectory of 3% per annum, it would take nearly 30 years for India’s per capita income to double.

• Growth not only boosts average income levels, but also generates extra funds for welfare programmes. After all, the biggest ever poverty decline in India’s post-Independence history occurred during the 2004-11 period when nearly 150 million people were pulled out of poverty, with the poverty rate falling to 22%.

Measures to revive the growth in India:

•  The Atmanirbhar Bharat Abhiyaan (Self-reliant India campaign) and announced the Special economic and comprehensive package of INR 20 lakh crores – equivalent to 10% of India’s GDP – to fight COVID-19 pandemic in India. This program will focus on land reforms, labour reforms , liquidity and simplifying the laws.
• Prepare for a health emergency: As former RBI governor Raghuram Rajan recently said, countries need to prioritise fighting COVID-19 over stimulus packages. 
• Ready a fiscal contingency plan:   A robust fiscal plan to revive the economy should be kept read
• Use the opportunity to push structural reforms: Coming close on the heels of US-China trade war, it could further turn foreign investors away from China. India should truly be making itself an easier place to do business including measures like simplifying the GST structure.
• Push domestic demand: The government may have to reorient its policies to boost domestic demand at a time global demand is set to remain tepid for a long period of time.
• Keeping monetary policy flexible: The Reserve Bank of India should also be ready to use all the tools at its disposal to provide financial stability while preserving economic growth.

Background:

1. Gross Domestic product:

• Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period.

• GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights.
• Nominal GDP: GDP evaluated at current market prices, in either the local currency or in U.S.

• GDP, purchasing power parity (PPP): GDP measured in “international dollars” using the method of Purchasing Power Parity (PPP), which adjusts for differences in local prices and costs of living in order to make cross-country comparisons of real output, real income, and living standards.
• Real GDP: Real GDP is an inflation-adjusted measure that reflects the quantity of goods and services produced by an economy in a given year, with prices held constant from year to year in order to separate out the impact of inflation or deflation from the trend in output over time.
• GDP Per Capita: GDP per capita is a measurement of the GDP per person in a country’s population.