As fiscal space gets limited in poor countries, governmental transfers must target the worst affected sections that cannot take the battering anymore
In October 2021, the IMF published three regular reports: The World Economic Outlook, The Financial Stability Report and the Fiscal Monitor. Omicron was as yet unborn, and economies were showing early signs of revival in those countries where a majority of the population were vaccinated and life was slowly picking up its lost threads. Yet the reports predicted an uncertain year ahead, noting that the near-term disruptions caused by the pandemic will leave lasting imprints on the medium-term performance of the global economy, making policy choices difficult with multiple challenges to be faced from “subdued employment growth, rising inflation, food insecurity, setback to human capital accumulation, and climate change-with limited room to manoeuvre”, as The World Economic Outlook notes.
It projected the global economy to grow 5.9 percent in 2021 and 4.9 percent in 2022, then hovering around a moderate 3.3 percent over the medium term. Supply disruptions which have already caused consumer price inflation in many countries, rich and poor alike, is expected to remain a cause of concern leading to shortage of key inputs for manufacturing in many countries, but Central banks mostly have avoided any tightening of interest rates so far, adopting a wait and watch policy instead. But the risk remains that waiting for too long without acting may cause inflation to become self-propelling in a spiral, creating more uncertainty. If not addressed timely, it could hold back private investment and recovery from the loss of employment cause by the pandemic. Low-income countries have already seen the highest rises in food prices hitting the poor hard.
Among the emerging market economies, the report projected that China which had registered a positive growth rate of 2.3 percent in 2020 will grow by 8 percent in 2021 and 5.6 percent in 2022, while India, which had registered negative growth of 7.3 percent in 2020 will grow by 9.5 percent in 2021 and 8.5 percent in 2022. Most advanced economies and emerging market and developing economies will reach or surpass their pre-pandemic output levels only by the end of 2022, but the recovery in employment is expected to lag behind output in many countries. Vaccinating the entire world population as fast as possible must remain the top policy priority to prevent the emergence of new variants and to hasten global economic recovery; the Report laid down a $50 billion plan to vaccinate at least 40 percent of the population in every country by the end of 2021 and 70 percent by mid-2022 through proactive vaccination programmes and access to improved healthcare facilities. As long as the existing enormous vaccine inequalities persist between countries, the risk of emergence of newer mutants will only be heightened. As fiscal space gets limited in poor countries, governmental transfers must increasingly target the worst affected sections that cannot take the battering any more. The year 2021 has already seen between 65 and 75 million people slipping into poverty in low-income countries; unless addressed by a slew of measures including fiscal transfers and international aid, the resulting social discontent may become a contagion of unrest spilling across borders.
The report also noted that climate will pose another serious challenge to policymakers, as the current actions are grossly inadequate to prevent a dangerous overheating of the planet. Noting the array of extreme weather-related events, like the heat domes and intense wildfires in the USA and Canada, high precipitation and flooding in Europe, drought in Brazil, and floods in eastern and south Asia, combined with evidence from the Intergovernmental Panel on Climate Change that the world is experiencing the warmest period in over 100,000 years, the report notes that “these events have further raised fears that the highly adverse consequences of climate change may arise sooner rather than later, increasing the urgency of actions to reduce these risks and improve resilience.” That was before the November COP26 summit in Glasgow, and we have again seen the usual charade of unmet targets, half-hearted actions and lip-service to climatic pledges by the developed countries reflecting a yawning gap between expectation and reality.
As regards fiscal policy, though deficits have declined by an average of two percent of GDP in 2021, they still remain well above pre-pandemic levels, and are projected to return to their pre-pandemic levels not before 2026. In emerging markets and low-income countries, output and tax revenues may not regain their pre-crisis trajectory and the reduction in deficits, if any, will have to occur largely through lower spending, impacting the poor again. The massive policy stimuli given to battle the pandemic have also increased the financial vulnerabilities in many sectors, leading to unintended consequences like stretched asset valuations, which if left unchecked, may cause lasting damage to the global financial system. Global government debt is again reaching record peaks — close to 100 percent of GDP in many countries. In India, the general Government debt, i.e., the combined debt of the Centre and the states, is expected to reach an unprecedented 90.6 per cent of GDP during the current fiscal, before moderating to 88.8 per cent during FY23, but still will remain over 85 per cent at least till 2026-27. Though now there is consensus that debt can be stabilised even at that level by maintaining healthy interest growth rate differentials (IGRD), such high debt level increases the vulnerability to another economic shock like a protracted lockdown due to new emerging variants like the omicron that has since taken the world by the storm, increasing the vulnerabilities and the uncertainties manifolds. Though its impacts are as yet conjectured to be milder than that of the deadly delta variant, it has already clouded the economic outlooks almost everywhere and replaced the optimism seen earlier with a dark pessimism, as seen by the stock markets going into turmoil the world over. Governments are weary of imposing another protracted and costly lockdown, and are bracing for the worst.
As far as India is concerned, despite Omicron, most including the RBI agree that the IMF prediction of 9.5 percent growth in FY22 is achievable. Everyone is waiting for the budget with bated breath, hoping against hope that consumption will return to normal with healthy increases in tax revenues from direct taxes and the GST, driving higher capex and capacity expansion. For the time being, growth seems to be the priority over inflation. But interest rates will have to be raised sooner or later, as indicated by the US Federal Reserve’s decision to end the easy money policy by March 2021 and to raise the interest rates significantly in the next fiscal. This may lead to flight of capital from India weakening the rupee, making imports costlier, especially fuel prices that will hit us hard. Also, whether or not we develop a quick vaccine against Omicron, it is certainly not the last of mutants, and there will be others. Only through increasing our reliance on cutting-edge technology and faith in science to combat the virus should we expect to survive the pandemic and the economic gloom that is staring at us as another new year rings its bells.
(The writer is a former Director General, Comptroller & Auditor General of India, and currently a professor at the Arun Jaitley National Institute of Financial Administration. The views expressed are personal.)
