World Economic Situation and Prospects 2019

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The UN Report World Economic Situation and Prospects 2019 discusses various challenges before the global economy. The important of them are:

Trade Tensions

  • The global trade growth moderated at 3.8 per cent in 2018 against the growth rate of 5.3 per cent in 2017.
  • The stimulus measures and direct subsidies have offset much of the direct economic impacts on China and the United States.
  • But if these trade tensions continue for a prolonged period of time it may severely disrupt the global economy.
  • The spill over effects of this trade tensions would spread through global value chains, particularly in East Asia.

Tightening fiscal conditions

  • Tightening fiscal conditions would result in a rapid rise in interest rates.
  • On the other hand, the strengthening of the US dollar could exacerbate emerging market fragilities, leading to a heightened risk of debt distress.
  • These risks can be further aggravated by global trade tensions, monetary policy adjustment in developed economies, commodity price shocks, or domestic political or economic disruptions.
  • The countries with a substantial amount of dollar-denominated debt, high current account or fiscal deficits, large external financing needs and limited policy buffers are more vulnerable to stress due to tightening fiscal conditions.

Climate risks

  • The climate change risks necessitate a fundamental shift in the way the world powers economic strategies.
  • Integrating the economic decision making with negative climate risks associated with emissions would be imperative.
  • The tools for achieving the integration would be carbon pricing measures, energy efficiency regulations such as minimum performance standards and building codes, and reduction of socially inefficient fossil fuel subsidy regimes.

Challenges in attaining SDG:

The United Nations report World Economic Situation and Prospects 2019 discusses various challenges in attaining the sustainable development goals. The challenges listed are:

  • Economic growth is uneven and is failing to reach where it is most needed. Per capita incomes would stagnate or grow only marginally in 2019 in several parts of Africa, Western Asia, Latin America and the Caribbean.
  • Even where the per capita growth is strong, economic activity is driven by core industrial and urban regions, leaving peripheral and rural areas behind.
  • The report notes that eradicating poverty by 2030 will require both double-digit growth in Africa and steep reductions in income inequality. This seems a distant possibility in the current scenario.
  • The confluence of risks is clouding and it may severely disrupt economic activity and inflict significant damage on longer-term development prospects.
  • The various risks include escalation of trade policy disputes; financial instabilities linked to elevated levels of debt; and rising climate risks, as the world experiences an increasing number of extreme weather events.

The report notes that the simultaneous appearance of several important risks endangers efforts to achieve the 2030 Agenda for Sustainable Development containing 17 specific goals to promote prosperity and social well-being while protecting the environment.

Economy in 2018-2019 : Opportunities and Challenges

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Context

  • After several quarters of low growth, there has been a strong pick-up in the last quarter of 2017-18. If this momentum is maintained, the growth rate (2018-19) will certainly be above 7%.
  • Major concerns are- External environment, reviving the banking system, Impact on the fiscal position.
  • Agricultural growth may at best be equal to what it was last year. As the monsoon has been somewhat below expectations — the overall rainfall was deficiency.
  • The services sector may perform better because public expenditure will be maintained at a high level.
  • As of the industrial sector, the data for the Index of Industrial Production (IIP) shows substantial improvement.
  • The correlation between the IIP and national income data on manufacturing is poor.
  • The problems of the goods and services tax (GST) may have been largely overcome.

 

Issues

External environment

  • Trade wars have already started and can get worse.
  • The U.S. has raised duties on several products such as steel and aluminum.
  • China has retaliated as duties for some of its products has been raised.
  • India has also been caught in this exchange.
  • Iran, which have a direct impact on crude oil output and prices. India benefited from the fall in crude prices earlier but this position has reversed.
  • India’s trade deficit has always remained high.
  • The fall in crude oil prices had also affected the export growth.
  • With the rising of trade deficit and some outflow of capital, the rupee has depreciated
  • Solution:
    • Improved efficiency in production and better infrastructure.
    • Make the exports competitive.
    • Maintenance of domestic stability.
    • Search for an alternative fuel.

Reviving the banking system

  • A/c to the RBI’s latest report on financial stability, shows that the gross non-performing asset (NPA) ratio of scheduled commercial banks rose.
  • The high NPA level has a dampening effect on the provision of new credit. In fact, credit to the industrial sector has slowed down considerably.
  • Solutions:
    • Recapitalization of banks.
    • Asset reconstruction companies, have been made to resolve the NPA issue.
    • Medium-term banking reforms.

Impact on the fiscal position

  • Central government’s fiscal has been within limits.
  • There are two aspects of the fiscal which need to be kept under watch. – One relates to GST. It is estimated that GST revenues are currently running behind budgetary projections.
  • The second concern relates to the impact of the proposed minimum support prices (MSPs) for various agricultural commodities. The MSPs have been raised sharply in the case of some commodities.
  • Solution to MSP (If market prices fall below MSPs)-
  • M.P. model- where the State pays the difference between market price and MSP. But this can turn out to be a serious burden if market prices fall steeply. This is apart from the administrative problems involved in implementing the scheme.
  • The other alternative is for the government to procure excess production over normal production so that market prices rise. This alternative may be less burdensome. However, this alternative will not work if the MSP is fixed at a level to which the market price will never rise. .

 

Conclusion

  • The expected growth rate of 7.3-7.4% may be reassuring. It may even be the highest in the world economy.
  • It is below of what is needed to raise job opportunities and reduce poverty.
  • It is true that the external environment is not helpful.
  • Hence a stronger push towards a much higher growth is very much the need of the hour.

 

Source: https://www.thehindu.com/todays-paper/tp-opinion/growth-may-pick-up-but-concerns-remain/article24683982.ece

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