New Delhi: Emerging market economies may need to relook their export-led growth strategies and put controls on capital inflows to ensure macroeconomic stability, a report released by the United Nations Conference on Trade and Development (UNCTAD) warned at a time when India is taking steps to attract more foreign investment to bridge the current account deficit and support a weakening rupee.
In its Trade and Development Report 2013, released on Thursday, the arm of the United Nations warned that contracting demand for imports from the US could affect export growth in emerging market economies and potentially impact the trade balance.
“An export-oriented growth model is no longer viable in the current context of slow growth in development economies,” the report said.
The world economy is expected to grow at 2.1% in 2013 as against 2.2% in 2012, with countries like the US expected to grow at a slower rate of 1.7% in 2013 against 2.2% in 2012.
The report said that emerging market economies are importing much more now than before 2008. A large trade deficit may become unsustainable for developing economies and these countries should focus on domestic demand and ways to generate employment and improve wages to support growth, it suggested.
The report also says that developing economies should adopt a “cautious and selective” approach towards foreign capital inflows as these tend to create macroeconomic instability, currency appreciation and fuel asset-price bubbles. It suggested “pragmatic exchange rate policies and capital account management” to reduce vulnerability to external financial shocks.
The report sounds a warning bell for India, said Jayati Ghosh, professor of economics at Jawaharlal Nehru University. “India should look at reducing its current account deficit through reducing imports of gold and other non-essential items, including luxury goods. There are a lot of items under the import list that we can produce domestically,” she said.
Ghosh also highlighted the risks of encouraging hot money flows into the country.
“A small change in interest rates by the United States or even a remote hint about some action can lead to such a huge flight of capital. India should take steps to ensure that the short-term flows are not encouraged. Either they should be taxed at a higher rate or restrictions should be placed with regards to how and when it can exit,” she said.
India’s current account deficit rose to 4.8% of gross domestic product in 2012-13 from 4.2% in 2011-12.
The rupee fell to a record low of 68.85 against the dollar on 28 August before recovering after steps were announced by the new Reserve Bank of India governor Raghuram Rajan. On Thursday, the rupee ended at 63.54 to a dollar, down 17 paise from Wednesday’s close of 63.37.