[Editorial Analysis] Best way out

Mains Paper 2: International Relations
Prelims level: International Monetary Fund
Mains level: Important International institutions, agencies and fora, their structure, mandate

Context:

• The International Monetary Fund’s (IMF) latest World Economic Outlook underlines the extent of the dislocation in economic activities across the world due to the COVID-19 pandemic.

• At the aggregate level, the Fund expects the global economy to contract by 4.4 per cent in 2020, with sharp differences across countries.

• For the Indian economy, the Fund’s prognosis is grim.

• The IMF now expects the Indian economy to contract by 10.3 per cent this fiscal year, worse than its earlier forecast, and that of the RBI’s.

• Of the major economies, only two others, Italy and Spain, are expected to contract in double digits.

Reversal of trend:

• The Fund’s latest assessment comes at a time when the signals from the BJP-ruled Centre suggest a reversal of decades of trade liberalisation and a return to the failed policies of self-sufficiency or atmanirbharta.

• A comparison with Bangladesh in this regard is instructive.

• According to the IMF’s medium-term forecasts, Bangladesh’s per capita GDP is expected to overtake India’s this year, though as the Indian economy rebounds next year, the situation is likely to reverse.

• However, over the five-year period ending in 2025, Bangladesh’s per capita GDP is expected to grow at a slightly higher pace, implying that in 2025, its per capita income would be $2,756, marginally higher than that of India’s at $2,729.

• In part, Bangladesh’s recent economic performance, and differences between the two countries can be traced to the former’s stellar export performance, especially in garments and apparel.

• In comparison, India’s exports have remained sluggish, as export pessimism has taken hold.

Drivers of growth:

• In the current context, with three of the four drivers of growth struggling, exports could provide the much-needed fillip to India’s economy.

• However, this would require India to reverse its recent stance on trade — lower rather than raise tariffs, embrace free trade agreements, and seek greater integration with global supply chains.

• Former chief economic advisor wrote that with wages in China rising, it has vacated about $140 billion in exports of unskilled labour intensive sectors, including apparel, clothing, leather and footwear.

• While countries like Bangladesh are better placed to take advantage of this opportunity, post-COVID, as companies try to hedge their supply chain risks, and shifts away from China intensify, this will provide India yet another opportunity.

• However, this will require the government to pivot away from protectionism.

Conclusion:

• Like Bangladesh, India should focus on world market, shun protectionism, seek greater integration with global supply chains.

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Prelims Questions:

Q.1) With reference to the RBI Deputy Governors, consider the following statements:

1. The Appointments Committee of the Cabinet has approved the appointment of RBI’s senior-most Executive Director M. Rajeshwar Rao as Deputy Governor.

2. The RBI needs four Deputy Governors: two from within the ranks, a commercial banker and an economist to head the monetary policy department.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

Mains Questions:

Q.1) Describe the key highlights of the IMF’s World Economic Outlook.

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