Looking Ahead: India in a Changing World
IMF News, February 13, 2020
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- Published: February 13, 2020
Introduction
- Speech: The 8th C.D. Deshmukh Memorial Lecture by IMF First Deputy Managing Director David Lipton, New Delhi, February 13, 2020.
- Context and framing:
- C.D. Deshmukh’s role at the 1944 Bretton Woods Conference and his advocacy that the IMF and World Bank address development needs.
- Recent moderation of some global risks (U.S.-China trade conflict, a hard Brexit) but emergence of new uncertainties, including the coronavirus epidemic impacting global value chains.
- Central narrative: coexistence of secular stagnation in many advanced economies and the potential for “secular dynamism” in India and other youthful, developing economies.
Secular Stagnation and Productivity
- Core findings:
- Advanced economies have been stuck in low gear for a decade due to lagging productivity and weak investment opportunities.
- Contributing factors: demographic change, legacy effects of the global financial crisis, and a possible waning of the IT revolution that began 30 years ago.
- The full productivity impact of big data and artificial intelligence is still uncertain.
- Global trade slowdown predates recent trade tensions and has intensified.
- Quantified impacts and estimates:
- In the year to October 2019, WTO members enacted restrictions covering about $750 billion of trade.
- The IMF predicts a 0.5 percent hit to global growth this year as a result.
- The IMF estimates that last year global growth would have been 0.5 percent lower without central bank support.
- Structural vulnerabilities: rising sovereign and corporate debt; markets signal low expectations for a business investment pickup.
- Implications for emerging markets:
- Search for yield has brought portfolio inflows and capital volatility to emerging markets.
- Many developing countries remain insufficiently “investable” due to opaque legal frameworks, corruption, import restrictions, and onerous regulation, constraining access to stable, long-term capital needed for large-scale infrastructure and sustained growth.
Driving Convergence (India-focused)
- India’s strengths and recent trajectory:
- India has been the fastest-growing large economy in recent years, with a young and growing population and significant untapped demand.
- Services success: India is one of the largest exporters of information, computer and telecommunications services—key drivers of productivity growth and a modern path to development.
- Constraints on faster convergence:
- Recent slowdown driven by weak domestic demand, falling credit growth, and financial system problems with significant balance sheet challenges.
- Longer-standing drags: lagging agriculture (contributing to falling rural consumption), slowing export growth, rising unemployment, falling labor force participation—particularly low for women.
- Manufacturing constraints: small scale of production, low productivity, trade restrictions, infrastructure gaps.
- Skills and education tradeoffs: investment in tertiary education fueled high-skilled services growth, but broader primary education access and reduced gender gaps in labor force participation are required to realize the demographic dividend.
- Growth scenarios for reaching half of U.S. per capita GDP:
- At an average of 9 percent growth a year, it would take 15 years.
- At 7 percent, that would be 19 years.
- At 5 percent growth—just a bit over last year’s fourth quarter growth—it would be 23 years.
- Automation risk:
- By one estimate, 14 percent of the global workforce—that is to say, 375 million workers—could lose their jobs in this decade as a result of automation.
- Some 9 percent of Indian workers could lose their jobs.
India’s Links to Global Value Chains
- Diagnosis:
- Greater use of foreign intermediate goods in producing exports is a route to stronger manufacturing.
- Policies that limit those linkages (e.g., tariffs on intermediate goods) constrain the emergence of globally competitive manufacturing and job creation.
- Observations on recent trade shifts:
- So far, trade tensions have had limited direct impact on India because its trade integration is relatively limited compared with other Asian exporters.
- The investment channel, however, could produce significant medium-term reverberations if trade tensions worsen.
- Example cited: a Nomura Securities study of 56 companies that relocated from China found 26 moved factories to Vietnam but only three to India—indicating India is lagging ASEAN in attracting production relocation.
- Policy imperatives to deepen value-chain integration:
- Invest in infrastructure.
- Reduce tariff and non-tariff barriers.
- Implement reforms that encourage emergence of larger, more productive manufacturers.
- Complement tertiary education successes with spending directed at primary education to broaden access and reduce gender gaps.
- Labor market reforms focused on protecting people rather than protecting jobs.
The Role of Multilateral Cooperation
- Rationale:
- Rapid convergence and sustained dynamism require global markets for goods, services, capital, and technology.
- Advanced-economy savers would benefit from opportunities to invest in profitable enterprises in fast-growing economies.
- Core areas for cooperative action and reform (policy recommendations):
- Address frictions surrounding economic integration:
- Solve conflicts over trade and global value chains.
- Work cooperatively on protection of intellectual property, unfair competitive practices, unreasonable restrictions on investments, and the buildup of tax havens.
- Undertake serious WTO reforms if needed.
- Strengthen mechanisms to manage spillovers and volatility:
- Mitigate disruptive shifts in market sentiment and capital flows.
- The IMF is working to develop a more robust set of policy tools to promote stability in the face of spillovers.
- Provide global public goods to confront existential threats:
- Climate change; cyber-threats; ownership and use of data; new pandemics; migration.
- These problems require multilateral solutions beyond individual countries acting alone.
- Overarching message:
- Individual country reforms to become investable are necessary but insufficient; multilateral cooperation and preserved integration are essential to address secular stagnation and enable emerging-market dynamism, benefiting the global economy.
International Monetary Fund press release of the February 13, 2020 speech by David Lipton, "Looking Ahead: India in a Changing World."