Stave off protectionism

India must secure economic stability to survive the trend

The latest World Economic Outlook by the International Monetary Fund (IMF) has presented a happier forecast for global growth, which is expected to rise from 3.1 per cent in 2016 to 3.5 per cent in 2017 and 3.6 per cent in 2018. This is an improvement over the October 2016 report. The IMF has attributed the improvement to “buoyant” financial markets and “a long-awaited cyclical recovery” in manufacturing and trade. A big part of the improvement in the market sentiment is because the US economy is expected to grow faster through 2017 and 2018, though most of the other advanced economies may not see a significant spurt in growth rates. So, the growth momentum will come from the emerging economies and India is projected to register the highest growth rates in both 2017 and 2018.

This is good news, but the IMF has added an important risk factor: While global economic growth is accelerating, rising protectionism risks steering it back on to rocky terrain. That is because the global economy is facing structural constraints such as low productivity growth and high income inequality. Such impediments are building pressures, leading to a choice of inward-looking policies, especially in the advanced economies. Last year saw two unexpected results — Brexit and the election of Donald Trump as US President — that provided protectionism political heft and turned it into a global call. So while Mr Trump calls for taxing outside companies and raising visa barriers, other global leaders seem to be following suit and protectionism is fast becoming the cornerstone of domestic policymaking across several countries. For instance, recently Malcolm Turnbull, the prime minister of Australia, a country dominated by immigrants, toughened foreign worker visas. This rising tide of protectionism threatens to undo the painstaking gains of global economic co-operation that has served the global economy well, especially helping countries such as China and India boost growth and pull millions out of poverty.

For India, as it is the case with most other emerging economies, protectionism in advanced economies will not only reduce the growth potential but also aggravate financial risks from rising excessive corporate debt. The IMF’s other recent publication, the Global Financial Stability Report (GFSR), details this at length. To begin with, India ranks highest among all emerging markets with regard to the percentage of current debt that is at risk: Over 20 per cent of the debt is on the books of companies that have an interest coverage ratio of less than one. With protectionism, servicing this debt will become even more difficult. This will, in turn, be bad news for the already beleaguered Indian banking system.

As the world waits to know the results of the next big global event — the French presidential elections — and its impact on protectionism, the road ahead is a tortuous one indeed. On Saturday, finance ministers and central bankers from around the world dropped a pledge to resist protectionism, in a further sign that the new US administration’s stance on trade is shifting the global debate. The group from IMF member countries issued a statement saying they would promote a level playing field in international trade but did not reiterate a previous commitment to “resist all forms of protectionism”. Since protectionism in advanced countries is not under their control, the central message for policymakers in India is to set their own house in order by means of securing financial sector stability and reducing government debt and wasteful expenditure.