Context
The provisional estimates of annual national income (2020-21), released on May 31 by the National Statistical Office, did not have any surprises, but for one, that is, there is nothing encouraging in the numbers.[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]
Important Findings
- The agriculture sector continued its impressive growth performance, reiterating that it still remains as the vital sector of the economy, especially at times of crisis.
- The manufacturing sector continued its subdued growth performance, failing to emerge as the growth driver, with production interruptions due to localised lockdowns to be blamed.
- The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%) and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
- Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q4 of 2020-21 is showing a growth of 1.6%, slightly better than expected, but for a period when the restrictions on mobility and economic activity witnessed reduction, this performance looks below par.
- Further, this growth, which is an improvement over the 0.5% rate of growth in the previous quarter, is a statistical artefact as it is not devoid of the base effect and seasonality which plagues quarterly estimates.
- The magnitude of contraction in the economy and the policy responses towards it raises an important issue, that is, the question of growth prospects for the next year.
Rising unemployment rate
Contextualising the current growth rates in terms of some other macroeconomic data would provide us a better perspective on growth recovery.
- First, the unemployment data released by the Centre for Monitoring Indian Economy (CMIE) which says, “In May 2021, India’s labour participation rate at 40 per cent was the same as it was in April 2021. But, the unemployment rate shot up to 11.9 per cent from 8 per cent in April.
- A stable labour participation rate combined with a higher unemployment rate implies a loss of jobs and a fall in the employment rate.
- According to CMIE, over 15 million jobs were lost in May 2021 itself.
- May 2021 was also the fourth consecutive month of a fall in employment. The more worrying fact is that the cumulative fall in employment since January 2021 is 25.3 million
- This shows that the second wave of the pandemic has already dented economic activities, postponing recovery further.
- The job losses also bring out the high informality and vulnerability of labour in India as of the total jobs lost during April-May, 17.2 million were of daily wage earners.
Elementary textbook economics tells us that employment and aggregate demand in an economy are related via the channel of disposable incomes of workers. We also know that aggregate demand and output growth have a positive correlation. Hence, the prospects of growth revival in the next year look bleak at the moment and from this perspective, it is worrying that in just April and May 2021, India lost 25 million non-farm jobs.
Low business confidence
- This gets reflected in the business confidence of Indian companies, which is the second important data point that needs to examined.
- Business confidence index (BCI), from the survey by the industry body FICCI, plummeted to 51.5 from 74.2 in the previous round.
- The survey also highlights the weak demand conditions in the economy. It says, “With household income being severely impacted and past savings being already drawn on during the first wave of infections, demand conditions can be expected to remain weak for longer.”
- Compounding this is the uncertainty arising out of the imposition of localised curbs due to the second wave of infections and a muddled vaccine policy in the country.
- Manufacturing Purchasing Managers’ Index (PMI) also throws some light on the shape of things to come. PMI has slipped to a 10-month low indicating that the manufacturing sector is showing signs of strain with growth projections being revised lower.
- Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.
Demand recovery
Growth recovery depends on demand recovery. External demand looks robust as India’s exports touched $32 billion in May 2021, 67% higher than in May 2020 and 8% more than in May 2019. The combined increase in exports of April and May 2021 is over 12% indicating that global demand rebound is much faster than the domestic demand.
Stimulus programmes and a sharp decline in COVID-19 infections seem to be aiding these economies. What needs to be addressed immediately is the crisis of low domestic demand.
Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures, with more and more guarantees by the government to improve flow of credit to important sectors.
There has been less direct action by the government to support the vulnerable to alleviate their hardships. There were some sector-specific measures to alleviate distress in certain sectors, which were timely.
However, this policy stance is unlikely to prop up growth for three reasons.
- First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side. In times of financial anxiety, what is needed is direct state spending for a quick demand boost.
- Second, large parts of all the stimulus packages announced till now would work only in the medium term. These include policies related to the external sector, infrastructure and manufacturing sector.
- In fact, some of the policies towards agriculture, such as productivity enhancement through the introduction of new varieties, will only work over years.
- Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side as this could result in poor growth performance if private investments do not pick up.
- Further, the credit easing approach would take a longer time to multiply incomes as lending involves a lender’s discretion and borrower’s obligation.
- Interestingly, a tight-fisted fiscal policy approach comes at a time when conventional fiscal stimulus packages might not be enough as supply side issues arising out of episodic lockdowns need to be addressed simultaneously.
What is required now is a sharp revival in overall demand. Focusing on short-term magnified growth rates resting on low bases might be erroneous, as income levels matter more than growth rates at this juncture.
Focusing on growth rates has its merits in the long term as achieving higher income levels require sustained growth for longer periods. Bangladesh seems to be doing this without much fanfare, but the quest for sustained higher growth has been elusive for India for the last five years.
Public spending is the key
Right now, raising public spending is the only game in town left to the policymaker serious about bringing on a recovery. If we are to have it, though, we should accept a higher than budgeted deficit. A debate involving economists and central bankers has been set off on whether the government should now ‘print money’. This is the wrong way to approach the problem. It puts the cart before the horse. It is also alarmist.
The objective is to revive the economy, public spending is the instrument and the funding must be found. It need not involve money creation. India’s public debt is low by comparison with the OECD countries, and debt financing remains an option.
Even if money financing is adopted, it need not cause accelerating inflation as some predict. Experience in India suggests otherwise. However, studies do show that any economic expansion would be inflationary if the production of food does not respond adequately. How the expansion is financed is less relevant for inflation at least in the near term.
Recent Posts
The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.