India can weather even a 50 bps growth sacrifice but for a year: Former RBI governor D Subbarao

However, in the medium to longer term, which is beyond a year, India cannot afford to sacrifice this 50 basis points on a year-on-year basis. This is all the more crucial for India, being a growing economy that has aspirations for a seat at the high table of rich nations be a $ 30 trillion economy.

To get there, growth in the early years has to be high as high growth on a larger base in later years will be difficult. “A 50 bps loss each year, will, in the long run upset the country’s long-term objective to emerge as a Viksit Bharat or a developed economy by 2047,” he says.

The Diversity Dividends

“People are talking about the need to diversify our exports to other geographies, explore newer sources of exports, improve the infrastructure in the country to attract more tourists for instance, enter into free trade agreements with other countries and trading blocks,” says Dr Subbarao. “All of these,” he says, “we must pursue irrespective of what happens in the trade with the US.”

Some of these could include concluding FTAs with EU, East Asian nations or joining the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). The CPTPP is a free trade agreement between a dozen countries – Australia, Brunei, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam apart from the United Kingdom.

Impact at the disaggregated level

But on the implications of the latest news on the levies announced by the US (while we are still unaware of what the final negotiations will yield) what Dr Subbarao also finds significant is that the current numbers, apart from the impact at an aggregate level on the growth rate of the economy, also entail an adverse impact at a disaggregated level and especially on the low income segments of the population. “This is because the hit will be in labour-intensive sectors like machinery and gems and jewellery that form major part of the exports to the US. Add to this, if India were to pivot from Russia to Saudi Arabia, for sourcing its petroleum needs, the aggregate cost of oil will increase for India and this will impact the inflation rate and the entire economy with higher impact on low-income households,” he says. Also, Dr Subbarao reminds, “higher oil prices globally will reflect in lowering of demand and thereby lower the global growth rates, which in turn, could have adverse implications for India.

Interrogate the internet or tap the easily accessible AI assistants and various numbers are being discussed. For example, there are estimates that suggest the negative impact on the exports to the US resulting in a decline in exports by as much as 40 per cent. A back of the envelope calculation of the net impact on the GDP taking into consideration also the export value to the US, the GVA (gross value added) of exports, will throw up a number of around US $ 20 billion for a full year but if, as several economists and industry leaders expect, nearly half of that could be offset by the other alternatives that the country could explore, the net direct impact would at most be 0.4 per cent of GDP (which today is at nearly $ 4 trillion). Hence, the argument doing the rounds is that India would be in a position to weather the impact. But the point Dr Subbarao is making is that this may not be sustainable in the medium to longer term and this is crucial given India’s long term high growth, developed economy, aspirations.

(FE.Com)