Can India Escape Global Economic Downturn?
The economic headwinds have turned against global growth. A global recession is now being projected due to spiralling wage-price risks, rising trade tensions, and adverse effects of climate policies on inflation and economic growth.
Global growth is projected to slow down from 6 per cent in 2021 to 3 per cent in 2023, and some expect and a turn to secular stagnation over the medium-term.
However, India has been viewed as an exception and a bright spot in this global downturn. The latest projections by IMF show that India will remain the fastest growing major economy this year and next year.
Can India escape this global economic downturn? The house is divided, and many still view that India may not be able to withstand the global economic downturn.
A compressive assessment of macro-micro data and long-term structural trends suggests that India may be able to escape this global economic downturn.
First, India’s growth model can withstand a global downturn, as its economic growth is largely being driven by the services sector. Empirical evidence has shown that services tend to shrink less compared to manufacturing during global economic downturns.
Second, unlike China and USA which have an ageing population, India will continue to benefit from a demographic dividend and its large youth bulge. Demographic dividend is associated with higher levels of savings and investments, which will enable India to withstand macroeconomic shocks.
Third, the rise of the middle class in India has created a huge domestic market that can withstand trade shocks. Fourth, India is on track to achieve climate goals, and it can withstand the near-term adverse impact of climate policies on inflation and economic growth.
India’s new growth model
India’s economic development has broken the iron law of development, which says that economic growth can be sustained only through industrialisation.
Unlike China where growth was driven by the manufacturing sector, India’s growth has been led by the service sector. India’s services sector has experienced a much faster pace of productivity and job growth compared to the manufacturing sector.
India has already made a huge digital leap, and it is expanding digital opportunities in education, energy, health, financial services and logistics, which has the potential to deliver economic value greater than USD 500 billion by 2025. It is unlikely that a global downturn will slow down the pace of the digital leap that India is making.
During past global downturns, global trade in services has remained much stronger compared to global trade in goods. In 2020, when global trade in goods shrank, global trade in digital services expanded by double digits.
Global exports of digitally delivered services have more than tripled during the last two decades, far greater than the trade in goods, and India stands out as a winner. Global trade in services is expected to remain strong in the future, and India will continue to benefit from the explosive growth in trade in services.
Demographic Dividend
India has one of the youngest populations in an ageing world. The median age in India is below 30, compared to 40 in China and the USA, 45 in Western Europe, and 50 in Japan. Demographics can change the pace and pattern of economic growth.
India’s demographic profile will sustain high growth through five distinct forces. The first is the swelling of India’s labour force, as baby boomers reach working age, which will avoid the risks of wage-price spiralling upwards in ageing economies.
The second is the potential to divert resources from spending on children to investing in physical and human infrastructure.
The third is the rise in women’s workforce activity that naturally accompanies a decline in fertility.
The fourth is that working ages also happen to be the prime years for savings, which is key to the accumulation of capital and technological innovation.
And the fifth is the further boost to savings that occurs as the incentive to save for longer periods of retirement increases with greater longevity.
India’s demographic profile is well positioned to withstand adverse macroeconomic shocks, and there is space to borrow from residents, and build public-private partnerships to finance additional spending on physical and human infrastructure.
Rise of Middle Class
A massive shift towards a middle-class society is already happening in India. India’s favourable demographic trends have set the stage for a massive expansion of the middle class and created new dynamics. It is expanding a huge domestic market and consumption.
Unlike the US, where domestic savings are declining, India’s domestic savings are on the rise.
India is expected to emerge with a middle class that is proportionately as large as that of the US today.
Empirical evidence, based on India’s household surveys, changing demographics and favourable trends in urbanization, show that a massive shift toward a middle-class society is already in the making. The precise numbers are less relevant than the trends— and those seem to be strong at present.
Is India’s rising middle class an engine of growth or a loose wheel? There are four key contributions that the middle class makes to economic growth and social progress.
First, the middle class is a source of entrepreneurship.
Second, the middle class is a major contributor to savings and human capital, as savings rates and the willingness to invest in human capital are higher amongst middle-class households.
Third, they strengthen the links with democracy, free press and education.
The fourth channel that makes the middle-class special relates to consumption. The expanding demand for consumer durables— cars, motorcycles, televisions, air conditioners, mobile phones and refrigerators— is already happening. The middle class is also demanding housing, shopping malls, and other infrastructure.
Climate Change
A good indicator of green growth is energy efficiency— electricity consumption per unit of output. India is on track to achieving the climate change agenda. India’s energy efficiency has improved in urban areas, and this result is much stronger during periods of high economic growth and energy price increases.
The energy-intensive industries (e.g., iron and steel, fertiliser, petroleum refining, cement, aluminium and pulp and paper) account for the bulk of the energy consumed in the sector and it has recorded greater energy efficiency improvement since the late 1980s.
Many factors account for progress made on green growth, including greater competition, rising energy prices, and the promotion of energy efficiency schemes.
A nationally integrated green growth policy— energy subsidy reforms, carbon tax and new technology- has the potential to further improve energy efficiency and at a much faster pace in the future.
Future
As global economic growth slows sharply, with many major economies gripped with worries of recession, India is likely to remain an exception.
Its strong structural trends— service-led growth, demographic dividend, the rise of the middle class and improvements in the climate change agenda— suggest that it will be able to withstand the global economic downturn, although nothing can be taken for granted.
