India will see solid economic growth, but not as much as it would if global conditions were as in the early 2000s, said Indermit Gill, chief economist and senior vice-president for development economics at the World Bank. Gill told Deepshikha Sikarwar in an interview that isolated bank failures would not be a danger to India, but a generalised banking crisis may lead to a global recession, and a noticeable slowdown in India.
Gill, who spearheaded the influential 2009 World Development Report on economic geography and is known for introducing the concept of the ‘middle-income trap,’ noted that globally, potential growth rates were going down compared to the first decade of this millennium. Edited excerpts.
The world economy, as per the World Bank, is staring at a ‘lost decade.’ Can policy interventions help recoup some ground when new challenges are cropping up?
The last time the world lost a decade — or at least large parts of the world lost a decade of development — was in the 1980s. Three to four things that happened then are like what's happening now. One was an increase in oil price. Then, we started to get interest rate hikes in the US; they were faster and greater than what we’ve seen now. This left a trail of developing countries bankrupt because the cost of borrowing went up.
That's what we worry about today since we are starting to see the same sort of things. Growth is slow and we have high inflation. As a result, monetary policy must become progressively tighter. While interest rate hikes are not as big this time round, we don’t have fiscal policy instruments because many countries, especially the advanced economies, spent a lot during the pandemic.
What about India?
Fortunately for India, we are going to have solid economic growth. But it will not be nearly as solid as we might have expected if global conditions were more like what they were in the early 2000s.
Countries like India did better fiscally (during the pandemic). Many emerging market economies like India didn’t spend a whole lot, though there were pressures on the finance minister to spend more. I think she did well to not overspend. As a result, we now have a stable fiscal situation.
The developed world banking crisis looks contained for now, but can further rise in interest rates cause further turbulence? Will there be a spillover impact on the emerging world?
The answer is yes and yes. These things are hard to forecast. For example, if you go back to the time of the global financial crisis, we had bank failures interspersed by periods of optimism. Bear Stearns failed, then things looked contained for nearly 12 months, and then Lehman happened.
Sometimes it takes a while for something that might seem to be an isolated banking crisis to turn into something more generalised. I don't think we can rule that out. If that happens, I don't believe there will be serious financial contagion to countries like India. But there will be economic contagion, in the sense that slower growth in the world will affect every economy —even well-managed ones. While this is unlikely, you can’t rule out the likelihood of a global recession.
Read more at: https://economictimes.indiatimes.com/epaper/delhicapital/2023/apr/17/et-front/india-growth-to-be-solid-but-global-climate-will-count/articleshow/99541303.cms
Comments