Question

Which of the following is cited as a reason for the slowdown in growth in developing economies, including India, mentioned in the context of Kerala?

• A. Strong external demand and high business confidence.
• B. Weak external demand, uncertainty, and loss of business confidence.
• C. Expansionary fiscal policies in major trade partners.
• D. Low unemployment rates in the European Union and USA.

Answer 1

Answer:

B. Weak external demand, uncertainty, and loss of business confidence.

Reasons for Slowdown in Developing Economies

• Weak External Demand

  • Definition: This refers to a reduction in demand for goods and services from international markets, particularly from developed economies like the USA, Europe, and China.
  • Impact on Developing Economies: Many developing nations, including India, are heavily reliant on exports for their economic growth. A decline in global demand directly translates to fewer orders, reduced production, and a slowdown in export-oriented industries.
  • Global Financial Crisis (2008-09): The aftermath of the 2008 global financial crisis led to prolonged sluggish growth in many developed economies, significantly impacting their import capacities and thus affecting developing world exports.
  • Trade Wars and Protectionism: Escalating trade tensions (e.g., US-China trade war) and a rise in protectionist policies globally can further restrict cross-border trade, dampening external demand.

• Uncertainty

  • Geopolitical Risks: Conflicts, political instability in major regions, and trade disputes create an unpredictable global environment, deterring long-term investments.
  • Policy Uncertainty: Frequent changes or lack of clarity in economic policies (both domestic and international) can make businesses hesitant to invest or expand.
  • Commodity Price Volatility: Fluctuations in global oil prices or other key commodities can introduce significant uncertainty for import-dependent or export-dependent economies.
  • Impact on Investment: High levels of uncertainty discourage both domestic and foreign direct investment (FDI), which are crucial for job creation and economic growth.

• Loss of Business Confidence

  • Link to Demand and Uncertainty: Weak external demand and prevailing uncertainties directly erode business confidence. When businesses anticipate lower sales or face unpredictable conditions, they become cautious.
  • Reduced Investment: A decline in confidence leads companies to postpone or cancel expansion plans, new projects, and capital expenditure, which are vital for economic dynamism.
  • Impact on Employment: Lower business confidence often results in a slowdown in hiring or even job losses, affecting consumer spending and overall economic activity.
  • Domestic Factors: In India's context, factors like issues with credit availability, non-performing assets (NPAs) in banks, and regulatory hurdles can also contribute to low business confidence domestically.

• India's Context and Kerala's Relevance

  • India's Vulnerability: As a large, open economy, India is susceptible to global economic fluctuations. Weak global demand impacts India's exports, particularly in sectors like textiles, gems and jewellery, and engineering goods.
  • Private Investment Cycle: A key challenge for India during slowdowns has often been a subdued private investment cycle, which needs confidence and demand to revive.
  • Kerala's Specific Exposure: Kerala's economy has significant linkages to the global economy.
  1. Remittances: A large portion of Kerala's population works abroad, especially in the Middle East. Global economic slowdowns, particularly in oil-producing nations, can reduce job opportunities and remittances, which are a significant component of Kerala's GSDP.
  2. Tourism: Global economic downturns can reduce international tourist arrivals to Kerala, impacting a vital service sector.
  3. Exports: Kerala's exports, such as marine products, spices, and coir products, are also vulnerable to weak external demand.
  • 'Kerala Model' Resilience: While sensitive to external shocks, the 'Kerala Model' of development, with its strong social indicators and high human development index, has often shown resilience in social sectors even during economic downturns. However, economic growth remains impacted by global trends.