Indian Economy, 5th edition (52 page)

6.
Food Security:
To India, this implies meeting minimum energy and protein norms along with requisite micro-nutrients for all at affordable prices. With the increase in income, the demand for food in India is bound to rise further. It has also been observed that even marginal shortages in specific food items in India tend to have a disproportionately large impact on the relevant prices even in the international market. Even though India, for most food products, is not an importer in most years, dependence on global markets could imply greater vulnerability both in terms of
prices
and
availability.
The link between financialization of commodities and its impact on commodity prices and their volatility has been an issue of international concern, even though there has been no clear consensus on the cause-effect relationship
20
.

7.
Fiscal Resources:
Often,
a case is made for the virtues of a
minimalist state
21
and the need to disengage from a number of activities. The actual facts speak otherwise. India’s general government expenditure in relation to GDP is actually lower even in comparison to many market economies by a factor of at least half. More importantly, the ratio of general government revenues to GDP at 17.6 per cent
22
is one of the lowest in emerging economies and certainly very low in comparision to the advanced economies. Therefore, even if fiscal consolidation is needed, the priority has to be on raising resources. Recent developments in the developed economies reveal how important it is to maintain the revenue base and keep government finances in shape. The increased exposure to the external economy will make India’s fiscal strength based on a large revenue base even more critical.

8.
FDI Diplomacy:
Many of the advanced economies, with deep technological strengths, are now
aging societies
and need to invest overseas and rely on factor incomes. The stage at which India is placed, the need for sustained investment has already been stressed
23
. There is an inherent complementary relationship between India’s requirement for more ‘real’ investment and the need for some of the advanced economies, including some of the Asian industrialised economies, to invest in production facilities in friendly countries overseas in order to diversify their supply chains.

9.
Remittances:
are an important source of financial flows and, as per World Bank estimates, remittance flows into developing countries in 2011 were to the tune of US $ 351 billion. Remittance flows into India are estimated to be of the order of US $ 58 billion. In 2010, remittances into the country accounted for
3 per cent of GDP.
Reasons
24
for such high inflows could be:

(i)
the higher oil prices that helped the Gulf countries and other oil exporters to earn higher profits/income (where a large number of Indian workers are employed – whose higher earnings made higher transfers possible to India), and

(ii)
the depreciation in rupee currency in the latter half of 2011.

10.
Systems of Economy & Polity:
The global economic crisis opened afresh the debate on the relative
role of the market and the state
as also the relative advantages of democratic versus state-led economies. The challenge of managing a mixed economy within a democratic and federal system is a complex task. However, the challenge of transiting from a state-led monolith to a more representative system may be even more daunting. In either case, for a system to thrive, economic outcomes need to be tangible. The
critical question
is therefore not of state versus markets but, rather, of how to maximise market outcomes (minimise market failures) and have effective governance (i.e. minimise government failure) with a democratic system as the political basis for governance.

Presently, India enjoys the unique advantage of having
multiple drivers of growth
.
These are
demographic, investment (backed by domestic savings), domestic consumption,
as well as
exports
and ample
scope for FDI
, all of which are within a
pluralistic
and democratic system . This unique combination more or less assures it of strong and sustained growth. But this assurance comes with a very challenging socio-economic rider. Its vibrating pluralistic polity makes it utterly necessary to achieve/deliver positive economic outcomes in tangible way at every stage and to every section of society
25
.

THE PATH TO REVIVAL

The proximate
causes
for the global financial crisis (that reached a flash point in October 2008 with the collapse of
Lehman Brothers
) have been all encompassing which may be summed-up
26
as given below:

(i)
The loose monetary policies adopted by reserve currency-issuing advanced economies (particularly the US) in the run up to the crisis (at the macro level);

(ii)
The mercantilist policies adopted by export-led economies leading to accumulation of large current account surpluses and forex reserves;

(iii)
Weaknesses in the international monetary system (IMS), particularly the absence of
alternative reserve assets
to the dollar;

(iv)
Weak regulation of financial markets and intermediaries; and

(v)
Excessive financial innovation and risk taking by finance and banking intermediaries (which led to the US ‘sub-prime crisis’) [the last four points were active at the micro level].

Attempts of the G-20

As the reasons forwarded for the global crisis varied to different issues the debates and
discussions in the G 20
(and other fora involving international organizations and financial institutions) have, therefore, been on wide-ranging issues. The question of how policies for reviving growth of individual countries impinge on the global economy and its imbalances and whether they could somehow be better coordinated has been at the centre of these discussions. These discussions are of some importance as they may, in the years to come, shape the style and substance of governance of the global economy. It is critical that the outcomes, if any, address the concerns of emerging economies
(such as India)
that are major drivers of global economic growth.

This section of the book
examines a few selected issues that have been the subject of international deliberations (mainly in the G 20) and how they are relevant to India, many of them still evolving.

In 2011, the G-20 (formed in 1999 in the aftermath of the East Asian Crisis as a forum for Finance Ministers and central bank Governors) came to centrestage following the
Leaders’ Summit
in Washington DC in November 2008 to focus on coordinated measures to address the challenges faced in the immediate aftermath of the global financial crisis. A declaration in the G-20 Summit at Pittsburgh, USA, in 2009
(the Pittsburgh Declaration)
formally raised the forum to the level of leaders and transformed it into the premier forum for international economic cooperation.

At its latest Summit
(sixth)
held at
Cannes,
France (3-4 November 2011), the agenda followed the priorities laid out by the French Presidency. This agenda got deliberated in 2011 in two channels:

(i)
The first was the finance channel, which largely focused on the framework for strong, sustainable and balanced growth, reform of the International Monetary System (IMS), strengthening financial regulation, and other issues relating to commodity price volatility.

(ii)
The second set of issues in the Sherpa’s Channel focused on development-related issues.

During the global financial crisis, collective and coordinated policy action by the G-20 through macroeconomic stimulus (fiscal and monetary) and financial-sector intervention helped avoid a catastrophic meltdown. Building on this, G-20 Leaders launched the
‘Framework for Strong, Sustainable, and Balanced Growth’
with India and Canada as the co-chairs of the Working Group in 2009. In this signature effort of the G-20, the Mutual Assessment Process (MAP) forms a medium-term exercise to ensure that collective policy actions benefit all and policies are collectively consistent with the G-20’s growth objectives.

At the
Seoul Summit
(2010) the G-20 committed to working to address key imbalances that could jeopardize growth and to enhance the MAP with indicative guidelines for key imbalances while in February 2011, the G-20 agreed to include three other important factors inducing external and internal imbalances, i.e.:

(i)
public debt and fiscal deficits,

(ii)
private saving and private debt, and

(iii)
the external position – trade balance and net investment income flows and transfers.

The Summit was able to reach a level of
consensus
on the following points:

(i)
Indicative guidelines to be used to identify systemically important countries and assess each other’s economic policies;

(ii)
To suggest policy remedies;

(iii)
To address potentially destabilising imbalances; and

(iv)
To set the stage for assessing the progress toward external sustainability.

Measured in terms of share in global GDP, in this regard, India has been identified as systemically important economy. But it is clearly a net contributor to global demand as evidenced from its current account deficit. While India’s exchange rate is largely market determined, its domestic savings are largely oriented to financing domestic investment appropriate at a stage of high growth but not at the cost of curbing consumption. Even if India is not a contributor to global imbalances, its interest clearly lies in smooth resolution of these issues and towards measures that could help revive global growth.

Reforming the IMF

The current international monetary system (IMS) has no mechanism to prevent a build-up of imbalances on the external account and the burden of adjustment falls on deficit nations. In the run up to the crisis of 2008, it was felt that countries like the US could somehow sustain fiscal and current account deficits by virtue of the privilege of issuing a reserve currency. But this trend instead accentuated the so-called external imbalances, even if it was not the primary cause of the crisis that turned global.

The G 20 Working Group on Reform of the IMS (set up at the Cannes Summit) focused, among others, on capital flows and their management (CFM), the measurement of global liquidity, holding of international reserves, and future role and composition of the special drawing rights (SDR). While the
latter two issues
remain areas of continuing work, drawing on the work of the IMS group, the Cannes Summit communiqué mentions that the
‘Coherent Conclusions for the Management of Capital Flows’ (CCMCF)
would guide the G-20 in order to reap the benefits of financial globalisation, while preventing and managing risks that could undermine financial stability and sustainable growth at national and global levels.