With India’s policymakers regularly harping on taking the country on a high-growth trajectory, and with increased participation of the private sector while at the same time gradually folding up the public sector, there is a strong lesson from the latest United Nations report. 

As the world enters the fifth anniversary of the global economic crisis (the Lehmann Brothers bank crashed on September 14, bringing down with it the US, and then much of the world’s economies), the United Nations Conference on Trade and Development (UNCTAD) report says going back to high (read pre-crisis) growth rate should not be the aim of developing economies.

In what could be called a u-turn, years after the multilateral global bodies pushed for increased participation of private players in the high-growth race, the UNCTAD report also suggests an active role of the public sector in the development process. “Developing and transition economies that are overly dependent on exports for growth need to reconsider their development strategies, and rely more on domestic and regional demand,” it says.

Titled ‘Trade and Development Report 2013: Adjusting to the changing dynamics of the world economy’, the report was released on Thursday (September 12) – both in India and globally.

The report practically suggests the opposite of what the Indian government is doing, eminent economist and Jawaharlal Nehru University professor Jayati Ghosh said. “India is still focusing on big corporate(s), not the small scale industries that just gets 2 percent of bank credit but generates more than 60 percent of employment in the country,” said Ghosh, who released the report.

Warning that reverting to pre-crisis growth strategies is neither possible nor desirable, the 149-page report suggests that developing countries should embark on a path of balanced growth. “Export-led development strategies are no longer viable. More balanced development strategies with a greater role for domestic and regional demand needed – this requires reconsideration of role of wages and public sector in development process,” it says.

According to the UNCTAD report, the public sector can further boost domestic demand by increasing public employment and undertaking investment.

The report, which recommends selective approach towards foreign capital inflow, comes soon after finance minister P Chidambaram met foreign institutional investors (FIIs) and top bankers in late-August to discuss ways to improve capital inflow into the country as the rupee depreciated into the late sixties against the US dollar.

 “Such flows may be needed for financing imports of productive inputs and capital goods, but they have often tended to create macroeconomic instability, currency appreciation and recurrent boom-and-bust financial episodes,” the report notes.

Instead, the report recommends domestic sources of finance. “These countries (developing and transition countries) will have to organise and manage their financial systems in such a way that they provide sufficient and stable long-term financing for the expansion of productive capacities and for the adaption of production to new demand patters,” it says.

India’s merchandise export fell by 1.76 percent to $300.60 billion in 2012-13 fiscal, while imports of $491.60 billion triggered an all-time high trade deficit of $191 billion. The current account deficit thus touched 4.7 percent of the GDP, according to the finance ministry.

According to the UNCTAD report, world output growth, which had already slowed down from 4.1 percent in 2010 to 2.8 percent in 2011 and 2.2 per cent in 2012, will not recover any time soon. It might further decelerate to 2.1 percent this year.