Global Macroeconomic Developments

Participants at a recent discussion held by Brookings India on global macroeconomic developments and their implications for India covered three broad areas: the overall global scenario – drivers of recovery and risk factors; the US environment – the recovery and its implications for macroeconomic policies; the Indian situation – vulnerabilities, consequences and policy opportunities and challenges.

Those present consisted of a mix of researchers, media-persons, representatives of international organizations and government representatives. Josh Felman of the International Monetary Fund began on an optimistic note assuring that advanced countries are on their way back to growth while slowed-down emerging markets will also come back. Felman noted that the areas most affected during the crisis have been fixed, explaining why the US Federal Reserve Bank has decided that it can start to taper. While growth in the US economy is still only 2% and unemployment is still high, Felman said that underlying problems created by the crisis are basically resolved. Gradually, the US economy will pick up steam and hence no longer requires the significant amount of monetary support that has been provided thus far.

Felman noted that the European crisis was, in some ways and some countries, much more acute than in the US. Since then, Europe has also adjusted and is recovering growth. Industrial production and overall economies have started to expand, unemployment has stopped rising while confidence and exports have started to increase. “People in Europe can feel it and you can see it in growing interest rates as people’s fears that the Euro might dissolve have gradually ebbed”, Felman said.

A question many participants engaged with was: what is happening in the emerging markets? Within the Indian debate, there are two distinctly different views. The first fears a fundamental growth model breakdown while the second is the necessary adjustment view – that everything that has happened to the currency is essentially an adjustment to lay the foundation for a recovery. Felman stated that slowdowns have been very sharp, leading to fears that growth models in emerging markets have been damaged fatally. However, he assured the audience that these fears are tremendously exaggerated. Felman said while India has had serious structural problems, these problems have always been there – they were there when the economy was growing very rapidly and they cannot explain why the economy slowed down.

Martin Rama, Chief Economist for the World Bank’s South Asia region, echoed Felman’s optimism, noting that recovering investment confidence will be very important. Rama said the recent rupee meltdown has provided a welcome wake-up call to authorities to provide more movement on the supply-side forces that will bring growth back.

Dipak Dasgupta, Principal Economic Advisor at the Ministry of Finance, said he had no doubt there is nothing fundamentally wrong with the growth story in India. The MoF is focused on a few things that will bring global confidence back to India. He emphasized focus on two primary points: the CAD and inflation. The challenging task ahead, he said, is retrieving investment confidence and putting emphasis on regulatory barriers that are preventing projects from taking off.

Felman concluded with hopeful uncertainty, “Have we solved the banking problem that got us into this mess? The honest answer is that we’ll only know in time. QE is not a policy that has casually been adopted in the US or in the world – it was a specific measure to deal with certain pressures. In 2009, every country was in the same situation – they all knew individually and collectively what they had to do. Now, the problem is twofold. Different countries are in different situations and fundamentally, it is just not clear what measures we ought to take.”