Strengthening the manufacturing industry and increasing domestic demand are key imperatives The IMF expects global economic growth to be just 3% this year, the lowest since the 2008 global financial crisis. Unlike in 2008, when India was insulated from a global economic meltdown, the economy now is on the ebb, with growth in the first quarter of 2019-20 hitting a six-year low of 5% and growth projections being slashed by agencies for the rest of FY20. What reforms can India pursue at this stage to align its manufacturing and trading activity with global demand patterns and protect itself from the world’s growth pangs? In a conversation moderated by Vikas Dhoot , Nagesh Kumar and N.R. Bhanumurthy look at the challenges and the road ahead. Edited excerpts: What has changed in the global economy in the last two years which has turned the headwinds India’s way? Nagesh Kumar:The latest IMF World Economic Outlook says there is a synchronised global economic slowdown. The trigger was probably the trade slowdown. Recently, the WTO also indicated that world trade growth would be 1.2% , down from 3%. So, a very anaemic or even a flat growth rate in trade is pulling down the economy. And because this is the age of global integration, all economies get affected. The trigger also lies in the protectionist tendencies of world economies and the U.S.-China trade war. India is also affected by this and other domestic issues. N.R. Bhanumurthy:The global slowdown seems to have started in early 2018 largely because of the premature withdrawal of the stimulus that the global economy was introduced to in the post-2008 crisis. Added to that, emerging market economies started showing some weaknesses. Brazil and South Africa have already got into the recessionary stage. A big country like China started slowing down although there are many who say it is deliberate to reduce the overheating the economy was facing. U.S. and China trade policies have worsened the global situation. The most unfortunate consequence of this for India is that compared to 2008, we are not immune to global slowdown. In fact, in 2008 we were growing faster. That is the main worry for us. Unfortunately, we seem to have realised only now that there is a slowdown. Some of us have argued it started in the second quarter of 2018 when we saw the pressure the domestic economy was facing. I would say that the global slowdown should take away almost 1.5 percentage points off the growth rate. The rest is domestically driven slowdown, with some cyclical and structural factors. I was looking at some of the numbers from the RBI. One scary number from April 2019 to right now: the net change in non-food credit to the commercial sector actually declined by Rs. 18,870 crore compared to the accretion of credit by Rs. 3.5 lakh crore a year ago. That shows the extent of the slowdown. In my view, it is becoming deeper now although the government has taken some measures in this period. My guess is we will be in the 6% growth rate (zone) for some more time. We thought India’s economy was largely insulated because of a large domestic market. Is there something that has changed in the last two years? NK:As the Indian economy has gradually opened up since 1991, the global economic situation has had spillovers in India. Between 2003 and 2008, the Indian economy was averaging between 8% and 9% growth. After the collapse of Lehman Brothers, it came down to 6.2%, but we were very solid. There is always a spillover of global headwinds on the Indian economy. Not only through trade, but through capital inflows which have been affected. What has also precipitated this, this time, is the Non-Banking Financial Companies [NBFC] crisis which has affected the flow of credit to capital goods. The demand for capital goods is down, as is car sales. Real estate is in trouble. The flow of credit to some of these sectors, which were an important determinant of sales, has been affected. This has resulted in a spillover in the rest of the economy. This is the time we have to worry about fiscal stimulus, not fiscal consolidation. There is a slump in demand. Public investment is very critical. Then there should be some kind of social spending which affects people in need with a high propensity to consume. Any cash reaching the poor will find its way into the market quickly. The reduction of corporate tax will have only a medium-term impact. In the short term, we need to get the money in the hands of the poor which pushes them to the market so aggregate demand gets generated and, in the process, we also address the inequalities in recent times. NRB:If you look at the global context, there are issues about how the U.S.-China trade war should have helped India. We should have done things differently. We started introducing import tariffs when we should have done the reverse. The reduction of corporate tax rates should have been done at the time of introducing the Budget. I am hoping that tariff duties will be reduced by the government. India’s exports have not been able to keep pace with expectations, especially in labour-intensive sectors like textiles, where Vietnam and Bangladesh have surged ahead. Is there something India can do to meet the challenges in the global landscape? NK:The dynamism in world trade is in the Eastern side. The Western markets are really flat. There is also a rise in protectionism. In such a situation, we need to tap the Asian markets. In that context, RCEP [Regional Comprehensive Economic Partnership] is an important initiative. It gives us a possibility to integrate the Indian economy and production with the value chains in east-Asian countries. However, you could be part of a trade agreement and not make use of it. And this is precisely the story of Indian industry. We have failed to make use of the preferential market access that was made available through various trade agreements. Indian industry has grown with the comfort of having a large domestic market. We need to nudge industry to look at global and regional markets, especially for labour-intensive goods.