Global Headwinds Will Drag India Down to 6-7% Growth

Brexit and Donald Trump’s election as US president signify deep structural issues that cannot be resolved by curbs on migrants, imports or any quick fix. The elephant in the room is falling western productivity. 

This means slower growth, which economist Larry Summers calls secular stagnation. Slower growth, combined with winner-takes-all trends (think Facebook, Amazon, Twitter) imply stagnant wages, job losses at low-to-middle levels, and hence a cry for de-globalization, PTI reported.

India will be dragged down by this megatrend. Too many analyses focus on local Indian issues. But India is no longer as self-sufficient as before. The Economic Survey shows that the share of international trade in Indian GDP more than doubled to a peak of 55% in 2008 before slowing to 40% today, which is still higher than China’s ratio.

“India is integrated with the global economy as never before, and will be hit by global headwinds as never before. So, I predict that the new normal for India’s GDP growth will be 6-7%, not the 8-10% optimists predict. In some years growth will exceed 7%, but fall well below in others,” Summers said.

The world’s top productivity guru, Robert Gordon, exposed the depth of the underlying problem in his book, The Rise and Fall of American Growth, whose logic applies equally to the EU, Japan and even China. US productivity growth is down from 1.7%/year to 0.7%/year, with no structural recovery in sight. Meanwhile growth of workers in the US is slowing, while the absolute number of workers is going to fall for decades in Germany, Japan and China.

GDP growth is simply the sum of worker growth and worker-productivity growth. If both are slowing or falling for deep structural reasons, growth will inevitably slow too. This problem cannot be resolved by quick fixes, and perhaps has no solution.

Gordon notes that productivity and GDP growth were close to zero through most of history before rising with the Industrial Revolution. Electricity and the internal combustion engines were huge productivity-enhancers, whose full effect lasted till the 1970s. Productivity peaked in 1972, and then tapered. A brief revival 1994-2004 (thanks to the internet, cellphone) was followed by a resumption of low productivity growth.

No new productivity enhancers are in sight, and anyway such enhancers can take decades to have their full impact. So productivity will remain depressed in the foreseeable future.