What might 2020 hold for us at both the global level and in India? As I try to peer through the fog of uncertainty and insufficient knowledge, I am struck by the long shadows cast by the year just ended. 2019 was not a good year, either for global cooperation, the world economy or the Indian economy. Let me share some thoughts on each of these.
Global political and economic cooperation
Across the entire spectrum of global cooperation, 2019 witnessed substantial deterioration. In large measure, this reflected the cumulative impact of US President Donald Trump’s decisive and sustained policy shift since 2017 in favour of unilateralism in international affairs — and away from institutions, treaties and practices of multilateral cooperation. Consider three examples.
First, in the domain of international trade, there are the well-known “trade wars” launched by Trump against China, Europe and some other countries. These are still rumbling on, taking their toll on global trade, investment and growth. The recent announcement of a probable “phase 1” agreement with China may help, though there is little clarity about how much and for how long. Perhaps, as important for the long run is the American undermining of the Appellate Body of the World Trade Organization (WTO) for dispute settlement, often described as the “jewel in the crown” of the institution. By systematically blocking appointments of replacements to the normal seven-judge membership of this body, the Trump administration finally ensured that membership was down to just one by December 11, 2019, thereby ensuring that the minimum three-judge requirement for panels for adjudicating trade disputes between WTO members would no longer be met. In effect, the Appellate Body ceased to function, placing world trade in the unprecedented and dangerous situation of having no effective dispute settlement mechanism. The potent negative effects will manifest in 2020 and beyond.
Second, the 2015 “Paris Agreement” on Climate Change has thus far achieved modest results by way of practical follow-up measures to curb global carbon emissions, which cause global warming, damaging climate change. Again, the Trump administration is a major culprit having given formal notice of unilateral US withdrawal in June 2017 and having worked actively against the thrust of the agreement both through national policies and uncooperative participation in annual UN climate summits. The latest such summit, COP 25 in Madrid last month, ended without recording significant progress. This despite the proliferation of scientific reports pointing out ominous, ongoing and anticipated consequences of carbon emissions and climate change. In a nutshell, we seem to be well on our way to a disastrous 3°C plus increase in global temperatures by 2100, despite the international agreement/aspiration to keep the rise below 2°C (preferably 1.5 °C).
Illustration: Binay Sinha
Third, the most important global public good — world peace— came under increasing strain during 2019 with the demise of the 1987 Intermediate-Range Nuclear Forces Treaty (between US and Russia) in August 2019, the loss of momentum to renew the critical New START (Strategic Arms Reduction Treaty) treaty (expiring February 2021), the lack of progress with agreeing limits on North Korea’s nuclear weapons programme, and the sharply rising conflict and tensions between Iran and the US (and her allies, Israel and Saudi Arabia). The US withdrew unilaterally from the 2015 multi-country Iran Nuclear deal in May 2018 and ratcheted up severe sanctions against Iran, and the American assassination of Iran’s top general last week raised the prospect of a major West Asian conflict in 2020.
In 2019, world economic growth (at market exchange rates) slowed markedly to 2.5 per cent, essentially because of a significant, synchronised slowdown in three big economies. The growth of the $21-trillion US economy slowed to 2.4 per cent, that of $19-trillion European Union (EU) to 1.5 per cent and $14-trillion China to 6.1 per cent. Together, this “big 3” account for over 60 per cent of world gross domestic product (GDP). Major causes of the slowdown include: The waning of the tax-cut stimulus in the US, the major trade wars, high total debt in China and a sharp slackening in EU’s main engine, Germany.
Despite anticipating continued deceleration in US and China and little change in EU, the October 2019 IMF World Economic Outlook foresees a small uptick in world economic growth to 2.7 per cent in 2020, mainly attributable to better expected performance in some large developing countries such as Brazil, Mexico, Turkey, India and Saudi Arabia. With the sudden ramping up of the conflict in West Asia in the last fortnight, these expectations now look too rosy. Depending on how the conflict and its ramifications evolve, it is quite possible that global economic growth in 2020 may be even slower than in 2019.
The Indian economy
In the six quarters to September 2019 India’s economic growth slumped from 8 per cent to 4.5 per cent and the government now expects full fiscal year 2019-20 growth to clock only 5 per cent, the lowest in a decade. (These official estimates may over-estimate real growth, given trends in high frequency economic indicators, the much-discussed frailties of the 2011-12 base national income series and the recently published research by former chief economic adviser, 2014-18, Arvind Subramanian.) The underlying causes of the sharp slowdown are widely debated. They probably include: Continuing high stress in the financial sector and high public sector borrowings, which have together damped private investment and consumption; a falling share of exports to GDP because of declining competitiveness and failure to plug into global value chains; a sharp slowdown in manufacturing; and major problems in key service sectors such as telecom, aviation and electric power.
Even before the recent growth slump, the latest official data for employment and unemployment, for 2017-18, showed a very poor job situation, with less than half the working age population participating in the labour force, high levels of youth unemployment and widespread underemployment. This unhappy situation has almost certainly worsened because of the steep growth slowdown in the last two years.
The prospects for a swift rebound in the growth of output and employment are not good, given the underlying policy and institutional constraints. In 2020, it is likely that economic growth will remain in the order of 5 per cent. It could be significantly lower if the conflict in West Asia escalates seriously.
The writer is honorary professor at ICRIER and former chief economic adviser to the Government of India. Views are personal