Shaktikanta Das: Fundamental shifts in the global economy - new
complexities, challenges and policy options
Keynote address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the
59th South East Asian Central Banks (SEACEN) Governors' Conference, Mumbai, 15
February 2024.
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On behalf of the Reserve Bank of India, the current Chair of the SEACEN (South East
Asian Central Banks) forum, I extend a warm welcome to Governors of central banks
and other delegates to this 59th SEACEN Governors' Conference. The weather in
Mumbai during this time of the year is pleasant and I hope you get some time for
sightseeing. As everyone in this hall is aware, SEACEN plays a pivotal role in
promoting collaboration, knowledge sharing and policy coordination among the member
central banks, and thereby contributes significantly to the stability, resilience and
sustainable development of the regional and the global economy.
We are gathered here at a critical juncture when the international economic landscape
is undergoing profound transformations. The prospects of a soft landing have improved
for the global economy, but there are multiple challenges with uncertainties looming on
the horizon. The theme of the Conference "Navigating Economic Headwinds and
Advancing Financial Inclusion: Perspectives and Challenges" aptly fits into the current
policy dilemma that all central banks of the region face today. In these times, prudent
macro-financial policies assume even greater importance for all of us to not only
navigate through the current turbulence, but also to chart a course towards a more
promising future. It is heartening to note that the economies in the region are making
notable progress and are positioning themselves for continued advancement in the
years ahead. There is a need for deeper integration in this region to stimulate economic
growth and foster inclusiveness. I am sure the insightful discussions at this conference
will offer some takeaways for our future policy making.
I have chosen the theme "Fundamental Shifts in the Global Economy: New
Complexities, Challenges and Policy Options" for my address today. First, I propose to
speak about the resilience of the global economy in recent years in marked contrast to
the earlier periods of crisis. Thereafter, I propose to outline the emerging trends and
shifts that are currently reshaping the global economy irreversibly and posing significant
challenges for policymakers. Finally, my effort would be to provide a macroeconomic
overview of our region, followed by highlighting some policy choices for the future.
Resilience of the Global Economy
According to the latest projection of the International Monetary Fund (IMF), the global
growth is projected at 3.1 percent in 2024 and 3.2 percent in 2025, with forecast for
2024 revised upward by 0.2 percentage point from its October 2023 projection. It is
interesting to note that that this time around the global economy has been far more
resilient, weathering repeated shocks remarkably well. Even the financial system has
broadly withstood the unprecedented monetary tightening across the world. The
resilience of emerging market economies (EMEs), in particular, stands out unlike
previous episodes of volatility which saw EMEs at the receiving end. EMEs have
probably learnt from their past experience and played it well this time. While there is no
definitive answer to this so called soft landing as yet, let me outline some possible
factors.
First, during the global financial crisis (GFC) and the previous episodes of global
turmoil, banking crises were a common feature in which insufficiently capitalised banks
were at the core of the crisis. In contrast, this time the EMEs did not face adverse
spillover effects from the recent banking sector turmoil in the advanced economies
(AEs) in March 2023. This has been possible due to the strengthening of prudential
regulation through wider adoption of Basel III norms and improvements in supervisory
practices, which has resulted in a much-improved banking and financial system.
Second, the improved macroeconomic fundamentals and buffers of the EMEs in recent
years provided cushion against global shocks of the last four years. Third, fiscal and
monetary stimulus provided during the COVID-19 has not been fully rolled back,
especially in AEs. This has so far somewhat restricted the degree of spillovers from
policy tightening by the AEs. Fourth, greater diffusion of technology in industry and
services has gained traction after the pandemic. This has enhanced productivity in
several EMEs and offset the adverse impact on output from factors like monetary
tightening. In fact, technology has opened up new vistas of opportunities for EMEs,
particularly in the services sector. Fifth, due credit also has to be given to calibrated and
clear communication by central banks. Effective communication has now become an
even stronger tool than earlier in providing forward guidance and anchoring market
expectations.
Changing Landscape of the Global Economy
The pandemic was an unprecedented crisis of epic proportions in terms of loss of life
and livelihood. In recent human history, recessions have been caused by swings in
agricultural production, sharp jump in oil prices and financial upheavals. The global
financial crisis also was a manifestation of the financial excesses growing under the
benign neglect of policymakers. In contrast, the pandemic was a health emergency
leading to a complete shutdown of economic activity and mobility to save lives against
an unknown enemy. Consequently, there was no clear or readymade template for
policymakers to follow; instead, they had to innovate and learn on the job in framing
appropriate policy responses to minimise the negative impact of the pandemic on the
economy and the financial system.
When the shadows of the pandemic were receding, geopolitical tensions and supply
chain disruptions fuelled new challenges and inflation came back strongly. The resultant
regime shift in monetary policy rattled financial market sentiments leading to a period of
'great volatility'. Existing models that were built to explain historical patterns in the data
were found wanting in explaining the new realities. These models are now being
increasingly challenged by ongoing shocks, geo-economic tensions and supply chain
reconfigurations. For instance, models focusing on aggregate analysis fell short to
explain what we observed in the aftermath of the pandemic. There was a rotation in
demand initially from services to goods and then from goods to services. There was
also a period of pent-up and revenge spending. These sectoral imbalances kept the
levels of inflation high. The pandemic has indeed highlighted the need for more granular
and sectoral analysis. In a sense, paradigm shifts in economic thinking are on the anvil.
Let me reflect on some of these issues further.
First, the world after the pandemic has changed fundamentally in terms of shifting
labour market dynamics, work processes and technological deepening. Work from
home, online education and shopping have received wide acceptance, altering the way
we work, learn and live. Technological innovation and digitalisation are permeating
through every sector of the economy. Businesses are adapting to these trends for their
survival. Frontier technologies like Artificial Intelligence (AI) and Machine Learning (ML)
are being used widely to boost productivity. These technologies open new
opportunities, but they also present challenges that we need to address.
Second, monetary policy before the pandemic was operating in a low for long regime in
its quest for reviving growth while resisting deflationary pressures. This situation
changed suddenly and drastically with monetary policy adopting the stance of "higher
for longer" rates to fight inflationary pressures, following the war in Ukraine. Such
regime shifts in the presence of debt overhang in an environment of high interest rates
and low growth raise concerns on macroeconomic stability in many countries. Higher
interest rates not only raise the interest servicing burden of heavily indebted countries
but also impact the balance sheet of banks and financial institutions, as it was seen
during the recent banking sector turmoil in advanced economies. In an extreme sense,
high indebtedness of countries may constrain monetary policy due to sharp trade-off
between price stability and financial stability.
Third, globalisation had boosted the global economy by enhancing productivity, creating
global value chains and free movement of capital and labour across countries. The
benefits of globalisation, however, had reached unevenly across countries. Given the
recent trends of geo-economic fragmentation, industrial and trade policies worldwide
are undergoing a shift. Several economies are now reshoring, nearshoring and
1
friendshoring their production processes on security and strategic considerations.
Consequently, there is growing trade fragmentation, technological decoupling, disrupted
capital flows and labour movements. All of these do not portend well for an integrated
global market for goods and services.
Fourth, from emerging market economies (EMEs) perspective, disruptions in trade
flows in food, energy and critical industrial inputs due to recurring geopolitical
flashpoints and disturbances in key trade routes are raising concerns for food security
and macroeconomic management. Moreover, in view of the volatility in financial
markets and capital flows, these countries remain vulnerable to external shocks. In
such an environment, creation of domestic buffers in terms of strategic reserves of
critical commodities as well as a strong umbrella of forex reserves become imperative
for the EMEs.
Fifth, macroeconomic models used by central banks so far have mainly focused on the
demand side of the economy. Enough emphasis was not given on supply side factors.
The pandemic, followed by the war, and the resultant supply chain disruptions have
brought in a sharp focus on the supply side. Overlapping supply shocks, as we saw
recently, led to persistent inflationary pressures even when aggregate demand was not
unreasonably high. In this context, the role of governments in managing the supply-side
or cost-push pressures on inflation has increasingly gained wider acceptance. Going
forward, a better understanding of the supply side of the economy has become very
important for conducting monetary policy more effectively.
Against this background, let me now briefly touch upon the macroeconomic settings in
our region.
Macroeconomic Overview of the SEACEN Region
The South-East Asian economies have shown remarkable resilience in the face of large
global shocks. To a large extent, this can be attributed to improved monetary and
macroeconomic policy framework that these countries have adopted in recent years.
Growth in this region has remained strong, while inflation has been lower than the
OECD average. Economic activity of the region has been supported by resilient
services activity across sectors such as retail trade, digital services, e-commerce and
tourism. This region remains a model of regional integration with close trade and labour
flow linkages. Nevertheless, there is significant untapped potential for further trade
integration. I strongly feel that promotion of tourism within the SEACEN countries can
further strengthen the economies of the region.
Turning to the Indian economy, India has successfully navigated through multiple
challenges and emerged as the fastest growing large economy. Prudent monetary and
fiscal policies have paved the path for India's success in sailing through these rough
waters. The Reserve Bank projects the Indian economy to grow by 7.0 per cent during
2024-25, marking the fourth successive year of growth at or above 7 per cent. Inflation
has moderated from the highs of the summer of 2022. Recurring food price shocks and
renewed flash points on the geo-political front, however, pose challenges to the ongoing
disinflation process. We remain vigilant to navigate through the last mile of disinflation
as it is often the most difficult part of the journey. We firmly recognise that stable and
low inflation will provide the necessary bedrock for sustainable economic growth.
India's coordinated policy response in the face of a series of adverse shocks can be a
good template for the future. While monetary policy worked on anchoring inflation
expectations and quelling demand-pull pressures, supply side interventions by the
government alleviated supply-side pressures and moderated cost-push inflation.
Effective fiscal-monetary coordination was at the core of India's success.
I would now like to turn to some possible policy choices for the future course of the
global economy, as new realities take shape in the years to come.
Policy Choices Going Ahead
First, we need to chalk out an effective strategy for global cooperation and coordination
to deal with multiple challenges afflicting the global economy. Multilateralism must be
reenergised. In this regard, agreements on a "critical minerals corridor" and a "food
corridor" for safeguarding food security are necessary. Such arrangements have to be
fair and equitable.
Second, there is a need to develop cooperation in areas of common interest and urgent
needs such as climate change where no country can devise strategies on its own.
Smooth and orderly green transition is necessary to avoid disruptions to economic
activity and loss of growth potential. While the investment needs for smooth green
transition are large, the actual financial flows to green projects are highly skewed and
are, by and large, concentrated in advanced economies. As a result, there is a need to
enhance green capital flows to EMEs. At the same time, we have to be mindful of
potential financial stability implications of green transition.
Third, improving infrastructure remains key to long-term growth. While investment in
hard infrastructure (roads, ports, airports, electricity, water) is important, there has to be
equal emphasis on creating soft infrastructure (education, health, legal, financial,
institutional). Skill enhancement and increasing female labour force participation are
key to enhancing effective labour supply and potential growth of the region.
Fourth, India's experience has shown how Digital Public Infrastructure (DPI) can be
utilised for advancing financial inclusion and productivity gains through cost reductions.
Our sustained engagement in the India Stack and the Unified Payments Interface (UPI),
especially during the pandemic and thereafter, has given us the confidence that digital
public infrastructure can become a critical part of global public good when scaled up
beyond national boundaries. The linkage of Indian UPI and the fast payment systems of
a few other countries drives home the potential of the UPI to become an international
model for cross-border payments.
Fifth, new technological developments like artificial intelligence (AI) and machine
learning (ML) can bring about significant improvements in efficiency and productivity of
businesses. Necessary safeguards, however, need to be put in place to prevent the
misuse of technology. In particular, global financial market regulators need to be vigilant
about the possible misuse of AI and ML in perpetrating financial fraudulence.
Conclusion
The global economy stands at crossroads. Challenges remain in plenty, but new
opportunities are also knocking at the door. Together, the course we take from here will
decide our destiny in times to come. We need policies that are attuned to the new
realities of the global economy. In an uncertain world, central banks need to be
proactive to better serve the objectives of price and financial stability.
In this environment, collaboration is not an option but a necessity. We need greater
resolve and coordination to make significant progress in dealing with global challenges.
SEACEN, as a platform for central banks of the region, serves as a valuable forum for
sharing insights and fostering cooperation in several areas for enhanced progress and
prosperity. The cooperation among countries should give due consideration to the
principles of comparative advantage and resource endowments so that each one of us
benefits. Let us take our deliberations to the next level to achieve well-being of our
people and our economies.
Thank You, Namaskar.
1
The term "reshoring" refers to a country's transfer of (part of the) global supply chain
back home (or geographically closer to home the case of "nearshoring"). "Friend-
shoring" limits supply-chain networks and the sourcing of inputs to countries allied with
the home country and trusted partners with aligned strategic and political preferences.