Dependence on debt makes boom in India, China difficult to sustain

The world economy in 2017 is picking up but not lifting off, and while growth in China and India remains relatively buoyant, it is still at a slower pace than before the 2008 financial crisis and with serious downside risks, according to a report by UNCTAD — the United Nations' permanent intergovernmental body.

“(The world economy) Growth is expected to reach 2.6%, slightly higher than in 2016 but well below the pre-financial crisis average of 3.2%,” according to the UNCTAD’s ‘Trade and Development Report, 2017’ released on Thursday.

India’s growth performance depends to a large extent on reforms to its banking sector, which is burdened with large volumes of stressed and non-performing assets, and there are already signs of a reduction in the pace of credit creation, the report said.

“Since debt-financed private investment and consumption have been important drivers of growth in India, the easing of the credit boom is likely to slow GDP growth,” the report said.

Demonetisation, GST hit India

Significantly, it further said “in addition, the informal sector, which still accounts for at least one third of the country’s (India’s) GDP and more than four fifths of employment, was badly affected by the Government’s ‘demonetization’ move in November 2016, and it may be further affected by the roll-out of the Goods and Services Tax from July 2017.”

The report said China’s estimated debt-to-GDP ratio is 249%, adding that as the Chinese Government introduces measures to contain its rising debt, domestic demand could be squeezed, with adverse consequences.

The dependence on debt makes the boom in China and India difficult to sustain and raises the possibility that when the downturn occurs in these countries, deleveraging will accelerate the fall and make recovery difficult, the report said. Therefore, it said “expecting these countries to continue to serve as the growth poles that would fuel a global recovery is clearly unwarranted.”

Even if the current levels of growth in both China and India are sustained, it is unlikely that these countries will serve as growth poles for the global economy in the near future, it added.

On advanced economies, the report said the main obstacle to a robust recovery in such countries is fiscal austerity, which remains the default macroeconomic option. Capital inflows to developing countries remain negative, albeit less so than in recent years, it said, adding that unforeseen events could knock recovering economies off balance.

The growing concentration of markets is a major issue highlighted in the report, with potentially corrosive consequences for the political system. “As long as policymakers continue to brandish the austerity sword and measure policy success by asset prices and profit levels, big business will dominate in key sectors, and the already significant inequalities may worsen further,” it said. The report also examines other sources of anxiety linked to robots and gender discrimination, which are affecting job prospects in developed and developing economies alike.

The report outlines a global new deal to build more inclusive and caring economies. “This would combine economic recovery with regulatory reforms and redistribution policies, and do so with speed and at the requisite scale,” it said.

The report further said “In today’s integrated global economy, Governments will need to act together for any one country to achieve success. UNCTAD urges them to seize the opportunity offered by the Sustainable Development Goals and put in place a global new deal for the twenty-first century.”