Expanding domestic market can protect India from external environment

New Delhi, Sep 21 (IANS) India might be able to escape the worst of the adverse external environment due to the size of its economy and expanding domestic market, the United Nations Conference on Trade and Development (Unctad) said on Wednesday.

Unctad said this in its annual report — “Trade and Development Report 2016: Structural Transformation for Inclusive and Sustained Growth.”

According to the report, the size of India’s economy can act as a buffer against strong headwinds from the global economy.

“Size can provide somewhat of a buffer against strong headwinds from the global economy,” the report said.

“The two largest developing economies, China and India, may escape the worst of the adverse external environment due to their expanding domestic markets and a combination of sufficient foreign reserves and an effective use of their policy space.”

The report stated that China’s economy has slowed down sharply over the past few years, although it is still maintaining a relatively high growth rate of 6.5-7 per cent.

“India has so far managed the downside risks of the post-crisis period better than other emerging economies, and is now growing faster than China,” the report said.

“Private investment, which began rising strongly from the start of the millennium, continued to grow even as the crisis hit.”

However, the report pointed out that private sector’s investment is now showing signs of weakening, along with emerging debt servicing difficulties.

“Meanwhile, public investment has yet to take off, exposing infrastructure gaps that could hinder future growth,” the report said.

The Unctad’s report elaborated that India’s growth rate is projected to remain strong, at 7.5 per cent in 2016, further cementing the large terms-of-trade gains of 2015.

“Growth is primarily driven by rapidly expanding domestic consumption, supported by the low prices of commodities (particularly fuel), a rise in real incomes (including public sector wages) and lower inflation,” the report said.

“Export demand declined in 2015, and gross fixed capital formation weakened in late 2015 and early 2016; however, investment (private and public) is expected to expand, which would support a solid growth performance through to 2017.”

The report cautioned that despite positive trends, high public debt and current rates of inflation may limit the room for supportive fiscal policies.

“The stalled manufacturing share in GDP (Gross Domestic Product), as also reflected in the limited capacity of the sector to create jobs with higher wages, will need to be addressed to ensure India’s growth in the longer term.”

–IANS

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