Expanding domestic markets and enough forex reserves in India and China may shield them from the “worst of the adverse external environment”, a UN trade report said today.
India is growing faster than China as it has managed the downside risks of the post crisis period better than other emerging economies, said the UNCTAD Report 2016.
“Size can provide somewhat of a buffer against strong headwinds from the global economy,” it said, adding that “the two largest developing economies, China and India, may escape the worst of the adverse external environment due to their expanding domestic markets and a combination of sufficient foreign reserves and an effective use of their policy space.”
In large Asian countries investment shares have remained at relatively high levels over the past 40 years.
“Investment declined in those countries during the 1997-1998 crisis, but has gradually recovered in most of these countries, stabilising at 25-30 per cent of GDP, and this helps explain the solid GDP growth performance of these economies,” it said.
However, in India private investments which were stronger earlier, have now shown signs of weakening, along with the emerging debt servicing difficulties, the report pointed out.
“Public investment has yet to take off, exposing infrastructure gaps that could hinder future growth,” it said.
JNU Professor of Economics Jayati Ghosh, who unveiled the report, said massive investments will be needed to diversify and expand growth also the profits reaped by companies needed to be channelised towards further investment.
“All successful economies allow companies to make profit and also ensure that it translates into investment. But now the link between profit and investment is falling across the world. In India, the firms are not investing their money. Non- financial companies are putting their money into financial assets like stock markets than to invest,” Ghosh said.
“Companies are borrowing from the banks but are putting their money into financial assets. All is not well,” she said.
She also stressed on the need for a new approach towards the industrial policy which focuses on productivity growth.
“It (industrial policy) has to create demand and encourage wages than to see it as costs. You also have to build institutions that allows you to do so,” Ghosh said.
On Foreign Direct Investment, she said investment towards greenfield projects is very little.
In reply to a question on devaluation of rupee she said it is not going to help exports as it is demand dependent.
India should instead focus on forging regional relations to boost trade prospects than to look at the west, she added.
The report said economic slowdown in the advanced economies is the biggest drag on global growth, but developing countries are now caught in the downdraft.
“Policymakers all around the world face a difficult combination of sluggish investment, productivity slowdown, stagnant trade, rising inequality and mounting level of debt,” said UNCTAD Secretary General Mukhisa Kituyi.
“Solutions require an ambitious rethink, not a tepid business as usual reaction,” Kituyi said.