Tuesday / June 18.


By S. Sethuraman


The world economy is yet to make a full exit of the 2008 financial crisis and its recessionary aftermath, so that growth prospects for 2014, the sixth year, have had to be revised down, with the disappointing and uneven recovery, mainly among advanced nations. And geopolitical tensions in Eastern Europe and the Middle East, with limited impact so far, may hold greater risks going forward.


Global output is now pegged to 3.3 per cent this year but to rise to 3.8 per cent in 2015 (or 2.6 per cent and 3.2 respectively, based on market exchange rates), according to IMF’s World Economic Outlook (WEO). Advanced economies, accounting for 45 per cent of world output, are struggling with uneven recovery – USA exiting the crisis and holding some promise after its contraction in first quarter.


Growth in the euro area nearly stalled earlier this year. While this reflects in part temporary factors, low potential growth, nearly everywhere in the area are playing a role in slowing down the recovery


Growth in emerging market and developing economies (55 per cent of output) is projected to increase modestly in the second half of 2014 and into 2015. Stronger domestic demand as well as a recovery in external demand from faster growth in some advanced economies would beef up their growth. As in past years, emerging market and developing economies will continue to account for the lion’s share of global growth.


As Against a somewhat sombre background, India among EMEs, looks better placed, with an estimated growth projection of 5.6 per cent in 2014-15 and 6.4 per cent in 2015-16.  Growth this year is expected from both exports and the assumed pick-up in investment hopefully offsetting unfavourable monsoon effect. Indeed, the World Bank in its Update, with growth estimates for the two years identical to those of IMF, talks of a “Modi Dividend” in the following years.


While China’s growth is moderating to average 7.4 per cent this year and 7.1 per cent in 2015, as it makes rebalancing efforts toward sustainable growth, the World Bank sees India buoyed by expectations of reforms from the Modi Government.  For the IMF, the post-election recovery of confidence in India “also provides an opportunity to embark on its much-needed structural reforms”.


Basing on the government’s business orientation, the Bank expects private investment to pick up while declining oil prices should boost private sector competitiveness. But, it says, economic reforms would be needed for India to achieve its full long-term growth potential. Growth could accelerate to 7 per cent in 2016-17, if besides the FDI sectoral liberalizations, actions are taken to simplify land and labour law reforms. Strengthening external demand from advanced economies would also be supportive of higher growth.


On inflation, whatever the Modi Government claims, an IMF paper points out that Indian food and fuel inflation has remained high for several years, and second-round effects on core inflation are estimated to be large, with the high share of food in household expenditure and the role of food inflation in informing inflation expectations and wage setting.


India’s monetary policy stance, therefore, needs to remain tight “for a considerable length of time. In addition, progress on structural reforms to raise potential growth is critical to reduce the burden on monetary policy” This more than upholds the RBI hold on policy rates.


But the uncertainty surrounding the withdrawal of US Fed’s monetary accommodation for a start in rate revision from near zero continues, given its wider spillovers across other eonomies.IMF says the US purchases of assets for monetary stimulus would be wound down by the last quarter of 2014. The Fed policy rates are expected to increase “beginning in the second half of 2015”. But the debate among Fed officials and economists in USA points to an earlier start to rate revision which, however, would be gradual.


While there is recognition that some economies like those of India are better positioned with fundamentals to cushion the impact of a global rise in interest rates, there could still be risks to financial market stability. IMF notes the process of normalizing monetary policy in the United States and the United Kingdom is assumed to proceed smoothly, without large and protracted increases in financial market volatility and sharp movements in long-term interest rates. Commodity prices are projected to ease moderately amid a still hesitant recovery.


IMF says the global slowdown is partly due to the legacies of the pre-crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery. And in advanced economies as well as in emerging market and developing economies, there is a general, urgent need for structural reforms to strengthen growth potential or make growth more sustainable.


The WEO urges both advanced economies as well as emerging market and developing economies to undertake structural reforms to strengthen growth potential or make growth more sustainable. Bolder policies can inject a new momentum into the world economy to help it overcome a disappointing recovery, IMF chief Christine Lagarde says ahead of IMF-World Bank Annual Meetings (October 10-12). The current recovery is brittle, uneven, and beset by risks.


On reforms to raise growth more robustly, IMF lists removing infrastructure bottlenecks in the power sector (India and South Africa), easing limits on trade and investment and improving business conditions (Indonesia, Russia); and implementing reforms to education, labor, and product markets to raise competitiveness and productivity  in India, Brazil, China and South Africa.


Also, lately, IMF has come out with a strong call for increasing public investment in countries where conditions are right, with clearly identified infrastructure needs and efficient public investment processes, and where there is economic slack and monetary accommodation. The increased public investment would provide a much-needed boost to demand in the short term and would also help raise potential output in the long term. But IMF has not explained what countries in deficit like India but badly need demand and growth-promoting infrastructure development.


Capital flows to emerging market economies have remained robust despite generally weaker activity, and exchange rates have stabilized or strengthened in some of these economies, according to the report. (IPA Service)

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