Trade
Enigmas of the Indian economy
Author: Alok Sheel, ICRIER
According to the IMF’s World Economic Outlook update of July 2019, India was the fastest-growing major economy in 2017 and 2018 and is estimated to remain so in 2019 and 2020. The headline macroeconomic fundamentals appear benign. The general government fiscal deficit, inflation and current account deficit are within the targeted 6 per cent, 4 per cent and 2 per cent respectively. The rupee is stable.
IMF growth estimates are based on those of India’s Central Statistical Organization (CSO). They are contested by reputed economists as they appear out of sync with several other economic indicators correlated with GDP growth.
Based on these alternative indicators — which seem to reflect growth much like China’s Le Keqiang index — Arvind Subramanian, India’s former chief economic advisor, recently argued that India’s growth is 2.5 per cent lower than officially estimated. On the other hand, another noted economist, Arun Kumar, estimates GDP growth to be just 1 per cent, arguing that neither the CSO, the IMF nor Arvind Subramanian have factored in the recent shrinkage of India’s large informal sector, which accounts for over 90 per cent of employment and almost half of GDP.
The current account deficit conceals a sharp contraction in exports that includes a slowing of India’s major engine of growth — information technology-enabled services. Imports have also decreased because of shrinking demand and rising oil prices. International trade as a share of the GDP has declined from 55 per cent in 2012–13 to 40 per cent in 2019.
The impressive fiscal deficit reduction over the last few years despite declining revenue growth is indicative of a steeper compression of public expenditure at a time of slower economic growth, an overestimation of tax revenues in the budget and a pushing of public expenditure off the balance sheet.
After years of impassioned debate over growth, there is finally consensus that the Indian economy is in crisis. The CSO data shows five consecutive quarters of declining growth. Differences remain over whether the downturn is cyclical or structural. If the downturn is cyclical, accommodative monetary and fiscal policies should get growth back on track. If the downturn is structural, structural reforms are essential.
The central bank has instigated four policy cuts since February 2019, reducing the benchmark repo rate from 6.5 per cent to 5.4 per cent. More rate cuts are expected soon. Fiscal policy was tightened at the time of the budget presentation in June 2019. The central government’s fiscal deficit declined from 5.9 per cent of GDP in 2011–12, to 3.9 per cent in 2015–16 and finally to where it now sits at an estimated 3.3 per cent in 2019–20.
The central bank has ample monetary space to reduce rates further as the policy rate is high when measured by the metrics of the Taylor Rule. Successive rate reductions have done little to reduce the cost and availability of credit due to structural impediments to monetary policy transmission. These include the lingering banking crisis, fiscal pressures and the floor set by regulated small savings rates. The fiscal policy space is constrained by the steep fall in tax revenues, a result of a poor GST reform, that were not accounted for in the 2019–20 Union Budget and were only partly plugged by the recent windfall received from the central bank.
Countercyclical macroeconomic policies may address the downturn in consumption but the long-term slowing of investment and net exports need structural reform. Other economic indicators show that while there were a few false dawns on account of a declining base, the Indian economy never fully recovered from the downturn that began around 2011–12. Its growth potential has possibly declined.
Before the Global Financial Crisis (GFC), exports, investment and consumption were increasing. Since then, the export and investment engines have started stuttering. Exports of goods and services have declined from 25 per cent of GDP in 2013–14 to less than 20 per cent in 2019. Gross domestic capital formation declined from 36 per cent in 2007–08 to below 30 per cent in 2015–16. It has stagnated ever since.
This left the economy running on consumption. Consumption has always been a higher share of India’s national income, insulating it against global downturns. Its share of GDP increased from under 66 per cent in 2010–11 to over 70 per cent by 2016–17. But this increase could not compensate for the slowdown in investment and exports.
Unless other engines of…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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