The 2020 Annual Meetings of World Bank Group (WBG) and International Monetary Fund (IMF) were held during the middle of this month conducted from Washington. The reports released prior to and during the meetings paint a very grim picture indicating that the pandemic has resulted in the largest global economic contraction of the last eight decades alluding to the 1930s Great Depression. The reports presented at the meeting further added that the pandemic is impacting all economies — developing, emerging and developed; increasing global poverty along with increasing income and wealth and social inequities, damaging long term economic growth prospects with the consequents flow on effects on lives and livelihoods.
According to the WB the pandemic crisis is expected to cause global GDP to contract by 5.2 per cent this year but will regain growth momentum achieving 4.2 per cent growth in 2021. The IMF forecast for global economic growth in 2020 and 2021 is also fairly similar at – 4.4 per cent for 2020 and 5.2 per cent for 2021. The crisis severely impacted developed economies like the US which is expected to contract by -6.1, also the European Union (EU) by -9.1 per cent and Japan by -6.1 per cent this year.
Even the outlook based on the assumption that the virus could be brought under control, the estimated loss to the global economy is expected to grow from US$11 trillion in 2020-21 to US$28 trillion in the period 2020-25. At least 90 million or even more people are expected to fall into extreme poverty this year alone.
All these and other developed countries as a consequence of the pandemic induced economic slowdown have resorted to various forms of fiscal stimulus exposing the dependence of these economies and their financial systems’ reliance on the state. According to the Fiscal Monitor Report of the IMF fiscal interventions by governments globally amount to US$12 trillion, close to 12 of global GDP and expected to continue to rise.
At the same time the central banks around the world led by the US Federal Reserve injected US$7.5 trillion in to the financial system. The increasing divergence between the financial economy and the real economy is further strengthening the possibility of a “K” type recovery.
As the talk of a quick rebound in the form of a “V” shaped recovery no longer appears to be on the horizon, talks are now centred around the far-reaching and deep going nature of the crisis, or even an emerging possibility of a “K” shaped recovery aided by the monetary easing and fiscal stimulus. This is happening at a time of sharp decline in government revenue due to economic contraction. All these have led to a surge in government debt as reflected in the rise of the public debt/GDP ratio around the world. This ratio now stands at 107 per cent in the US, 86 per cent in the UK, 169 per cent in Japan and 49 per cent in Germany in 2020. For a developing country like India this ratio now stands at 90 per cent while for Bangladesh it is 40 percent.
In line with the global economic outlook, South Asia’s economic outlook also looks very grim. According to the latest South Asia Economic Focus entitled “Beaten or Broken?” by the WB, regional growth in South Asia is expected to contract by 7.7 per cent in 2020, after topping 6 per cent annually in the past five years with India contracting by 9.9 per cent, Maldives by 19.5 per cent and Sri Lanka by 6.8 per cent.
The report further says that South Asia is experiencing its worst ever recession, with economic activity in the area brought ” to a near standstill”. Although the WB optimistically expects South Asia to rebound to 4.5 per cent growth rate in 2021, its per capita income will be 6 per cent lower than in 2019 due to population growth. The report clearly indicates that the expected rebound will not offset the lasting economic damage caused by the pandemic making its people far poorer than in 2019.
The Report also estimates that over 75 per cent of workforce in the region is in the informal sector and more people will be added to the ranks of the extreme poor in the South Asian region than in any other region in the world. Already 27 per cent of the extreme poor (who earn less than US$1.90 a day) in the world are in India ( 24 per cent) and Bangladesh (3 per cent).
To add to the economic woes of the region caused by the pandemic, according to the Atlantic Council, South Asia faces rising interest rates that increase its borrowing costs, also exports fall and remittances are expected to decline by 22 per cent. More alarmingly, the Council further adds that already foreign investors pulled out US$26 billion out of developing Asian economies of which US$16 billion have gone out of India alone.
As for Bangladesh, the report expects the growth rate to fall from 8.1 per cent in 2019 to 2 per cent in 2020 and poverty is likely to “increase significantly” with the greatest impact on ‘daily self-employed workers in the non-agriculture sector and salaried workers in the manufacturing sector”.
Furthermore, according to the WB survey the average earning of wage earners and daily workers in Bangladesh declined by 37 per cent compared to the usual earnings immediately prior to the outbreak of the pandemic. About 68 per cent of the directly affected workers are located in Dhaka and Chittagong numbering 26 million accounting for 16 per cent of the country’s population.
But it is the IMF report that seems to have caught the attention of the India’s mainstream media and Indian economic pundits in India and in the US are sparking deep anxiety, verging almost on a national hysteria. The report says that Indian economy severely hit by the pandemic, is projected to contract by 10.3 per cent this year, but will bounce back to 8.8 per cent growth in 2021. India’s central bank, the Reserve Bank of India (RBI) also projected a contraction of the economy by 9.5 per cent for the same period. Even prior to the outbreak of the pandemic, India achieved only 4.2 per cent growth in 2019.
Yet, the mainstream Indian media is inconsolable, but the grief is not at all so much about the economic gloom faced by the country, it is the news that India’s per capita income is projected to be lower than its neighbour Bangladesh in FY 2021. The IMF projection puts India’s per capita income at US$1,877 while that of Bangladesh at US$1,888– just a mere US$11 lead.
But the Indian media do not seem to be at all perturbed by Bhutan, Maldives and Sri Lanka– countries that will also outperform India in the per capita GDP during FY 2021, leaving only Pakistan and Nepal trailing behind India. In fact, Sri Lanka has been outperforming India in all most all economic and social indicators for a long time. Also, Bangladesh has already outperformed India for quite a while in terms of Infant mortality, Immunisation, Global hunger index, Gender development index and World happiness index.
Andy Mukherjee in the Bloomberg Opinion wrote, “India’s Covid-19 economic gloom turned into despair this week, on news that its per capita gross domestic product may be lower for 2020 than its neighbour Bangladesh”. He then bemoaned, “The relative underperformance may also dent self-confidence. If a country with large-power ambitions is beaten in its own backyard – by a smaller nation it helped liberate in 1971 by going to war with Pakistan – its influence in South Asia and the Indian Ocean could wane.”
Kaushik Basu, an eminent Indian economist now a Professor at Cornell University and a former Chief Economist of the World Bank was shocked at the news of India’s underperformance relative to Bangladesh and tweeted “it’s shocking that India, which had a lead of 25 per cent five years ago, is now trailing.”
However, former Chief Economic Adviser to the Indian government, Arvind Subramanian was very upbeat and reassuring to his country’s men and women, and is of the view that on “more appropriate” economic metric Bangladesh has not surpassed India and is unlikely to be in the future. He then downplayed the importance of GDP by asserting that GDP per capita is an estimate for one indicator of the average standard of welfare in a country. It will be rather intriguing to see what other indicators he might have in his mind which give a better picture of the average welfare of the country. Clearly, India is home to 24 percent of the poorest people in the world, it’s ranking in the World Hunger Index is below Bangladesh and Sri Lanka. 732 million people in the country do not have any toilet. Naturally, the question arises what India’s “higher per capita income” relative to its neighbours is doing to enhance the average welfare for the vast majority of its people.
Looking further ahead, according to the IMF, Bangladesh’s per capita GDP will stand at US$2,756 compared to India’s US$2,729 in 2025. But outstripping these two countries, Sri Lanka’s projected per capita GDP will be US$3,698 in the same year. So, the near to medium term economic outlook for India does not look promising.
There are a number of reasons for India’s current economic slowdown such as falling investment, downturn in exports and declining private consumption which is projected to be 10 per cent lower this year. All of these have been induced by the pandemic. But a recent research paper outlines far more deep rooted factors causing the slow down with the longer run implications for the Indian economy. The paper indicates India’s basket of exports is wrongly composed of “comparative advantage-defying specialisation”. In other word, India exports a lot of high skill manufactures where India does not have comparative advantage. Such a policy also does not help to create job opportunities for millions of new entrants into the labour market each year in India. On the contrary, Bangladesh has followed a low skilled labour intensive industrialisation policy and that’s where its comparative advantage lies.
The Financial Express