February , 2020
Effect of global economic and national social unrest on India
12:48 pm

Ahaan Kanaujia

Any unrest has an almost immediate effect on the economy, slowing down its immediate impact areas and casting ripples along its spread. Naturally therefore, as unrest and uncertainty have increased around the world, global growth has been restrained to the lowest level in the recent past and due to the global financial crisis which is an outcome of heightened trade and geopolitical tensions and country-specific factors prevailing in various international markets. The IMF's World Economic Outlook, October 2019, projected global growth at 3% for 2019 and at 3.4% for 2020. Almost as a corollary, trade relationships prosper and flourish when there is certainty along with predictability. Unfortunately, in most of the recent cases, trade tensions and new trade measures are no longer just a threat but are actually weighing down the global economy. There is a need for coordinated action by various economies confronted with such slowdowns.

Due to robust linkage of the Indian economy with the rest of the world achieved in recent past, global turmoil influences our domestic economy in a much bigger way than it did in the past. Though the spill over effect can take place through multiple channels, it mostly gets transmitted through the ‘commerce/trade channel’, the ‘capital flow channel’ and the ‘confidence channel’. Resultant effects of global economic crisis on India can be felt by observing various indigenous features like stagnation in the manufacturing sector, led by the dismal performance of the automobile, construction and real estate industries. Demand has been reduced in most other industries as well. Closing down of old established units, stagnation of start-ups and downsizing have become a reality in many regions. Quantum of Indian exports for the tenure of April to November 2019 has also decreased in comparison with the previous year, with a negative growth of -2.11%. Even the RBI in its 2019 December Monetary Report revised India’s current fiscal year GDP growth to a meagre 5%.  The Periodic Labour Force Survey (PLFS) estimated India’s unemployment rate in 2017-18 to be 6.1%, which is more than double than that of 2011-12, when the unemployment rate was 2.7%. The labour force participation rate in India as per PLFS 2017-18 is also awfully low at 36.9%. Many experts are calling this as an aggregate demand problem. The latest inflation figures have already raised the spectre of the dreaded ‘stagflation’.

The slowdown in the global economy is compounded by the US-China trade war. The tensions were seen as an opportunity in the beginning. However, efforts of many units that had made sincere attempts to replace Chinese firms as suppliers to the US markets have borne little realisation. According to a State Bank of India ‘Ecowrap’ report of July 2019, India has scarcely benefited from the US China retaliatory trade measures. US tariffs on China seem to have benefitted some other players such as Taiwan, Mexico, Vietnam, and the European Union. A recent outbreak of hostilities between U.S. and Iran has already surged oil prices by more than 4%. Unlike India, China continues to buy Iranian crude oil and is its largest buyer. Reports suggest that China will invest hugely in developing Iran’s oil, gas and petrochemicals sectors. It is expected that dependence on China will prevent Iran to act rationally towards India.

Despite these gloomy events, a recovery is expected in 2020 with the announcement of the ‘Phase One’ trade deal between the US and China that will de-escalate trade tensions, along with other developments like reduced likelihood of a no-deal Brexit. After the win of the Conservative Party in UK, the expectation of Brexit has brightened considerably. After finalisation of Brexit, there may be free trade along with free movement of expatriate/labour-force between the UK and the EU which is expected to have a long-term effect on the global economy including the Indian one. An important indicator of interest in the Indian economy are foreign investor companies that are gradually showing interest to purchase shares in Indian companies, resulting in increased inflow of dollars. Proliferation of e-commerce units and start-up sectors are also offering new opportunities. With tensions rising after the blacklisting of Huawei Technologies by the U.S., the big three Chinese high-tech companies, Baidu, Alibaba and Tencent have together poured in huge investments in Indian start-ups in 2018. India could use this opportunity to try and force China to open its market to India’s IT and other tech exports. The recent economic reforms announced in India, specially diminishing of the FDI limit, have assured global investors that the Indian government is very keen to bring India back with a more robust growth scenario. The impressive financial performance published by some indigenous companies has also added fuel to the turn-around situation of the Indian economy. After multiple announcements to boost the economy, the Finance Minister also gave hints on further steps to be taken in the current fiscal year. After lowering the corporate tax limit, the idea of lowering the personal income tax limit has created positive expectations. It is expected that growth will rebound due to the lagged effects of accommodative monetary policy and actions to facilitate its transmission will bring in much needed liquidity. Some confidence building has also come with greater clarity on corporate and environmental regulatory environment that was earlier characterised by fear and uncertainty. To ensure better and higher credit flows, the RBI has taken various steps. Lastly, additional support by the government to augment rural consumption through programmes like PM-Kisan Nidhi Yojana may finally see the economy take a positive turn. However, the rising inflation has also given rise to voicing of the dreaded word - stagflation. While slowdown is a global phenomenon, India had remained insulated from such events in the past due to its escalating consumer demand on the back of its demographic dividend. The stagnation in this consumption has caused concern among economists and the government should focus on the manufacturing sector and on efforts to become a part of

the global supply and value chain. There is a need to create a positive sentiment towards investment as well. Spending on infrastructure by both central and state governments would be key for growth. In this volatile global climate, investors are looking for a safe harbour for their investment. There is a need to project a strong and consistent policy direction that will guide it over the next five years and beyond.

The real fear is the rising social unrest. This phenomenon of street protest has suddenly captured the world and no part of the globe is unaffected. From Hong Kong to France, from Chile to Iraq people are on the streets. The anti CAA-NRC protests in India are also increasing. The involvement of students, who face bleak futures in view of the all-time high unemployment rate amid a stagnating economy, seems to be a desperate call to protect their futures. The climate change movement led by school going children seems to be an extension of this fight by the youth to secure a future for themselves – be it economic, social, political or environmental. The danger is from the deep-rooted unrest and lack of confidence among the youth. They are impatient and it is for all of us to ensure that their desperation can be addressed and fears allayed. It is only then that Indian economy will survive the present global crisis. In fact, the challenge is the internal unrest and not the external.

  The author is a young student of Economics and a keen observer of the socio-political scenario.


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