Davos 2020: IMF’s Gita Gopinath Says India’s Slowdown Most Important Factor For Trimming Global Outlook
Gita Gopinath weighs in on India’s economic slowdown and what it needs to do to get out of the rut.
The International Monetary Fund’s downward revision of global growth forecast was largely due to the economic slowdown in India, according to Chief Economist Gita Gopinath.
“We’ve had a significant downward revision for India, over a 100 basis point for each of these years. It’s probably the most important factor for the overall global downgrade of 0.1 percent,” Gopinath told BloombergQuint on the sidelines of the World Economic Forum in Davos, Switzerland.
The IMF lowered the growth estimate to 4.8 percent for 2019 due to stress in the non-bank financial sector and weak rural income growth. It expects growth to be 5.8 percent in 2020 and rise to 6.5 percent in 2021. For the world economy, IMF sees growth at 3.3 percent in 2020 compared with 2.9 percent in 2019. Both figures have been revised down from its forecasts in October—the sixth straight reduction by IMF for 2019.
Still, Gopinath said that there were signs of improvement of the “synchronised” global slowdown towards the end of last year. “We’re seeing some high-frequency indicators especially with manufacturing and global trade. There seem to be some signs of stabilisation,” she said. “But we aren’t seeing a recovery in investment yet. That would be something we would pay attention to.”
In India, which is set to unveil its Union Budget for the coming fiscal, Gopinath suggested that the government take steps keeping the fiscal room in mind. “In the case of India, it is important that the fiscal targets are met, at least from a medium-term perspective. It is also important that when spending is done, it’s done on public investment as opposed to consumption spending.”
In terms of the major issues to deal with, it’s the weakness in credit growth. How do you get credit growth back up while making sure at the same time that there will not be a second round of non-performing assets in the future? I think that’s the balance the government has to work towards.Gita Gopinath, Chief Economist, IMF
Watch the full interaction with IMF Chief Economist Gita Gopinath here.
Here is the edited transcript of the interaction:
The WEO has marginally lowered the growth forecast for 2019, 2020, 2021 and India was one big reason. Can you talk us through the global growth outlook?
For the global economy we have growth at 2.9 percent for 2019, and then 3.3 percent in 2020. That is a 0.1 percent downgrade relative to the past. So this is quite slight.
We’ve had a significant downward revision for India, over a 100 basis point for each of these years. It’s probably the most important factor for the overall global downgrade of 0.1 percent.
You said that “few signs of a turning points are still visible in global macroeconomic data”. What are you watching closely?
2019 was a year when the world was in a synchronised slowdown. Because pretty much all countries in the world were growing slower than in 2018. Towards the end of 2019, and now, we are seeing some high-frequency indicators especially with manufacturing and global trade. There seems to be some signs of stabilisation. But we’re not seeing a recovery in investment yet. That would be something we would pay attention to.
Given the U.S.-China phase 1 deal, you think the trade headwinds seem to have stalled if not passed?
The U.S.-China phase one of the trade deal has reduced uncertainty with regard to trade policy. That does help. We’ve upgraded China for 2020 because that helps. That said, risks aren’t off the table, trade uncertainty remains. One sector that was part of the reason why trade was weak was the auto sector which was shrinking quite severely in 2019. We are seeing some tentative signs of stabilisation there.
One of the things that the report doesn’t specifically address is the issue of low wages across the world. Your thoughts on that...
We have seen wage growth in the last two or three years and it has been quite sustained. But it’s certainly not growing fast enough that real incomes are growing substantially. And this is an important issue for the world to grapple with. You have rising inequality in the global economy and when you have most of the income going into hands of people who aren’t likely to spend much of it, that has a negative impact on demand and that keeps growth weaker. It’s a very important issue that has to be addressed. We’ve seen social unrest in many countries and that has had a growth impact.
While emphasising a balance between monetary and fiscal policy, you’ve said in the report that “national level policies should provide timely demand support”. What are you hoping for from the Indian government, especially since monetary policy seems to be done for now?
Let me clear on our fiscal advice: it’s important for countries to have fiscal space if you aren’t a country with large levels of debt or with large deficits.
In the case of India it is important that the fiscal targets are met, at least from a medium-term perspective. It is also important that when spending is done, it is done on public investment as opposed to consumption spending. There’s also another stimulus in India which is the monetary policy rate cuts that happened in 2019 and the corporate tax cuts. There is a stimulus.
In terms of the major issues to deal with, it’s the weakness in credit growth. How do you get credit growth back up while making sure at the same time that there will not be a second round of non-performing assets in the future? I think that’s the balance the government has to work towards.
You speak of public investment as opposed to consumption and of longer term measures. But the point is that we need desperately to get growth back up. You’re suggesting that if the government were to do something on the shorter-term consumption side, that would not be viewed well by the world?
Again, I do not want to make a blanket statement. What’s important is to recognise the underlying source of the problem. And that problem is the stress in the financial system. Some of that has to do with NPAs (non-performing assets) which have been around for a while. So there has to be faster resolution. And I talked about how there is need for greater infrastructure there in terms of being able to get timely resolution outcomes.
On the fiscal side, it’s important to make sure you have sufficient revenue mobilisation, including from GST. Those aspects have to be dealt with. It’s not a case of that if you were to increase spending you will make the deficit worse because you can shift spending from one area to another. And that can have an impact on growth. So there are many ways of doing it.
But I just want to flag that it’s important for there to be a medium-term fiscal consolidation target for India.
We’ve had one for a while but we have not necessarily been able to stick to it. The only reason I keep emphasising that it does seem that everyone is in favour of fiscal discipline but that will not improve a five percent scenario in anyway unless the base effect kicks in next year and after that. What’s the way out of this?
So we have a projection for growth in India to recover and that recovery is based on stimulus that’s already in the system, without any further stimulus. So we expect that with monetary policy system in there with corporate tax cuts, with the rural income transfer programme, that should raise growth in a year from now.
And it’s important for the government to focus on that recovery and fiscal discipline versus spending big this year?
Again, this is important from a medium-term perspective. Whatever deficit, whatever policy is undertaken it’s important to be comprehensive in terms of signalling that you do have a medium-term goal and to stay with it in a way that’s credible and not in a way that gives people reason to be anxious.