A new report by the World Bank has highlighted the faltering prospects of the global economy and urged policymakers to act urgently. According to the Bank’s calculations the global economy’s “potential” growth rate — the maximum rate at which an economy can grow without spiking inflation — is likely to hit a three-decade low of 2.2 per cent a year between now and 2030, down from 2.6 per cent in 2011-21 and 3.5 per cent during the first decade of this century. A series of overlapping crises in the past few years — such as the Covid-19 pandemic and the war in Ukraine — have weakened almost all the key drivers of long-term economic growth. In the words of David Malpass, President of the World Bank Group, “The result could be a lost decade in the making — not just for some countries or regions as has occurred in the past — but for the whole world.”
In its report, the Bank has shown how all the fundamental drivers of potential growth have been losing power. Be it capital accumulation (through investment growth), growth in labour force, or the growth of total factor productivity (which is the part of economic growth that results from more efficient use of inputs and which is often the result of technological changes) — all faltered in the past decade and the Bank expects all of them to slow further in the remainder of the current decade. What’s worse, as the recent bank collapses suggested, these weaknesses “could be even more pronounced if financial crises erupt in major economies and, especially, if they trigger a global recession”. While slowing growth is bad news for all concerned, it is particularly so for those economies — technically called the emerging market and developing economies (EMDEs) — that are trying to eradicate widespread poverty, tackle climate change and meet other key development objectives.
From India’s perspective, there are two ways to read the report. Despite being part of the EMDEs, unlike most of them, India is expected to grow faster than other economies. A slower global growth also implies that energy costs (read crude oil and natural gas prices) will likely remain manageable and that could be great news for an energy hungry and energy deficient country. However, an all round global slowdown as well as the reasons prompting it — geopolitical tensions, reduced openness to trade, policy uncertainty — will also make it tougher for India to achieve its growth ambitions. There won’t be a rising tide of global growth as it was during the high-growth phase of 2003-2008 to provide tailwinds. For instance, demand for India’s exports, a crucial engine of domestic growth, will likely stay muted. That means Indian policymakers will have to rededicate themselves to sustained economic reforms. More than anything else, this means boosting the productive capacity of the economy by investing in better physical as well as social infrastructure.
