Date: 13/12/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: Fiscal policy, fiscal prudence, Russia-Ukraine conflict, Pro-liquidity policies, RBI governor, IMF’s World Economic Outlook, Fiscal Responsibility and Budget Management Act of 2003, 'Revdi (doles) culture'.

Context:

• With India taking over the G20 presidency, one of the big jobs under the finance track is to ensure that G20 nations come up with a credible policy framework to tame inflation, especially food inflation, while protecting growth and ensuring overall financial stability.

Key Highlights:

• Pro-liquidity policies: The massive stimulus that was injected in almost all G20 nations to circumvent the fear of recession during Covid-19 has come back to haunt them in the form of excess liquidity, causing inflation.
• Russia-Ukraine conflict: War has flared fuel and food prices due to increase in crude oil prices.
• Climate change and Global warming effect: Climate change in the form of intense heat waves, floods and droughts, is also hitting food prices in several countries.

Global inflationary trends:

• In countries like Turkey, food inflation is surging at 103 per cent. Argentina’s food inflation is at 91.6 per cent.
• Experts wonder how such countries are controlling social unrest in their countries as the life-long savings of people are being eroded.
• Even in Germany, food inflation is at 17.7 per cent – an unprecedented phenomenon in decades.
• India is in a much better position with 7 per cent food inflation.
• The RBI governor has recently predicted that the worst of inflation is yet to come.
• The good thing is that India is taming inflation while scoring the highest GDP growth (6.1 per cent in 2023), as forecasted by the IMF’s World Economic Outlook.
• In terms of GDP growth, China is likely to be at 4.4 per cent, the US at 1 per cent, the Eurozone at 0.5 per cent and the UK at just 0.3 per cent.
• Global growth is likely to tumble from 6 per cent in 2021 to just 3.2 per cent in 2022 and 2.7 per cent in 2023.
• Advanced economies are likely to see even lower growth at only 2.4 per cent and 1.1 per cent in 2022 and 2023 respectively.
• Similarly, China’s growth has been downgraded to 3.2 per cent in 2022 (the lowest growth in more than four decades, excluding the initial Covid crisis in 2020).

Lessons and Learnings from India:

• Against the global backdrop of inflation and growth, India stands tall.
• India can give lessons to the G20 on how it has managed food inflation and yet maintained the highest rate of GDP growth.
• Food inflation has been hurting not just the G20 economies, but also several African nations where the purchasing power of people is very low.
• India can represent an agenda for the Global South, one thing it must do is to invite the African Union to the G20.
• African nations are suffering badly from food inflation for no fault of theirs and need support from the G20.
• 3Cs-Coordination, Cooperation and Collaboration:
  • Union Finance Minister Nirmala Sitharaman in the ICRIER conference has remarked that managing inflation with growth has to be done in a synchronized manner by the RBI, the Ministry of Finance, the Ministry of Food, and many other ministries.
  • It is like playing an orchestra with various policy tools to create a symphony. It can’t be done just by the central bank alone.
  • This is an important lesson that India can offer to G20 nations.

Indian Dilemma: Fiscal deficit vs High Growth Rate

• Indian challenges:
  • Indian GDP growth prospects are the brightest and inflation is under control, but fiscal deficit at 9.9 per cent (Centre and states combined) is the highest amongst all G20 countries.That’s not a good sign of sound macroeconomic management.
  • Disregard for Fiscal Responsibility and Budget Management Act of 2003 (FRBMA):
  • Legislation has envisioned bringing down the fiscal deficit to 3 percent of GDP. That has remained a tall order for almost all governments since 2003.
  • If India can bring down the fiscal deficit of the Centre in a calibrated manner somewhere between 3 to 4 per cent in the next year or two, without jeopardizing growth, that would be the real feather in India’s cap for macro-economic management.
  • It is not impossible, and can be done if efficiency in public expenditure is kept at a high priority.

Way ahead:

• Staying away from the 'Revdi (doles) culture'.
• The irrational subsidies have attracted the attention of the Election Commission as well as the Supreme Court.
• The Finance Commission had red flagged the growing culture of subsidies at the Centre and states. The time has come to bite the bullet on this.
• Need for targeted subsidies to the most vulnerable.
• However the dole culture has gone far beyond that welfare objective to almost using it as a bait to win elections.
• “Bribe for Votes” needs to be tamed.
• The best way to proceed is to set up a high level committee of credible professionals to look into this and suggest ways and means to bring in frugality and efficiency in public expenditures of the Centre and the States.
• Need to make subsidies more growth oriented, creating more jobs and livelihoods, and more environment protecting.

Conclusion:

• The G20 members are using monetary policy tools to douse inflation pressures. But the job is not yet over. The year 2023 will be a test case for the collective wisdom of the G20 in taming inflation and protecting growth.
• India is doing great in balancing growth with inflationary pressures that too in a professional and pragmatic manner, it can surely lead the G20 to a much more sustainable finance track.

Source: Indian Express

Mains Question

Q. The post covid world order can be characterized as ‘New Geometries; Fluid Partnerships; Uncertain Outcomes’. In this context, examine the significance of G20 grouping in bringing the current global order for stability and resilience? ( 15 marks).