Opinion
India’s economy: Now a force to reckon with globally?
Summary
- Large emerging market economies have caught up with the advanced world in generating economic spillovers, says IMF. Given their disruptive power, G20 must aim to work more closely together.
The G7 may need to move over for a new group on the block: Emerging market economies (EMEs). As the International Monetary Fund’s (IMF) April World Economic Outlook puts it, “The global economy is increasingly influenced by the Group of Twenty’s large emerging markets. Over the past two decades, these economies have become much more integrated with global markets and are generating larger economic ‘spillovers’ to the rest of the world." Even in a world where we have all come to accept that change is the only constant and got accustomed to the IMF recanting its position on ‘truths’ like capital account convertibility as a must and the need for fiscal austerity, regardless of the context in which such policies are sought to be imposed, the Fund’s statement is a revelation. It throws new light on what has long been accepted as a given in the global context. Namely, that spillovers are only one-way: from advanced to emerging markets; not the other way round. So, while the 2008 global financial crisis that had its origin in the US impacted countries the world over, crises like the East Asian crisis of 1997 or Latin American crisis of the 1980s impacted mainly other EMEs—typically, in the vicinity of the country at the centre of the problem. The LatAm crisis was largely confined to Latin America, while the East Asian crisis affected the ‘Asian Tigers,’ with advanced economies either unaffected or marginally affected.
We are talking here not only of crises, which have spillovers by their very nature, but also of domestic macro policies pursued by large economies. The legacy of the Bretton Woods conference established the US dollar as the international reserve currency. The resultant ‘exorbitant privilege’ of the US dollar means that the world’s largest economy can easily finance huge deficits because its government bonds are readily bought by other countries. Worse, any change in US policy has spillover effects on the rest of the world, as evidenced by the ‘taper tantrum’ of 2013, when a spike in US Treasury yields after the Federal Reserve said it would slow its pace of bond buying had a harsh ripple-to-near-tsunami effect on emerging-economy currencies. The Indian rupee, for example, depreciated from ₹55.80 to the dollar on 24 May to ₹65.24 by 6 September 2013, even as the Reserve Bank of India sold a net $14 billion from June to September on trying to keep its decline orderly. “Growth spillovers from domestic shocks in G20 emerging markets have increased over the past two decades," says the WEO, “and are now comparable to those from advanced economies." As we would expect, the largest EME spillovers are from China. These explain just as much of the variation in emerging-market output as those from the US. It is well known that China’s rise has spelt a shift in heft within the G20. But here’s the surprise: Other G20 emerging markets—such as India, Brazil, Russia and Mexico—also play an important role in the economic performance of their neighbours.
We could think of this new normal as sweet revenge for all the decades when EMEs were at the receiving end. But that would be self-defeating. In a globalized world, we sink or swim together. Spillovers are inevitable. And while it might be naïve to think that any country will frame policy keeping global rather than domestic fundamentals in mind, we must aim to work together to minimize the downside of spillovers.
